The Smart Portfolio - Issue #1

While most high earners focus on maximizing their salary and contributing to their 401(k), billionaires are playing an entirely different game that allows them to build wealth faster, keep more of it, and pass it on to their heirs while minimizing taxes.

Elite Financial Advisors Make the Difference

Recent research found that the most affluent private investors earned 6-10 percentage points higher returns than less affluent investors in private equity deals.  But it had nothing to do with access to the best funds.  The performance gap was attributed to the wealthy having more experienced financial advisors. [Democratizing Private Markets]

Elite advisors perform deeper due diligence, negotiate better terms, and time their clients’ commitments more effectively. They have relationships with fund managers, understand complex deal structures, and can spot red flags that could sink investor returns.

Exclusive Investment Opportunities

Wealthy families regularly take direct equity stakes in companies, join investor groups to buy private businesses, participate in late-stage startup funding rounds, or invest in private real estate projects as limited partners.

Hedge funds, private equity funds, and direct deal opportunities that can generate outsized returns simply aren't marketed to the public.

The catch?  These investments carry high risks and long lock-up periods.  The wealthy are simply better positioned to handle those risks.

The 83(b) Election: pay capital gains instead of income taxes

One of the most powerful wealth-building strategies involves getting paid in equity rather than cash, then using tax code provisions to minimize the tax hit. [What is an 83(b) election]

Early-stage founders and advisors file what's called an 83(b) election when their unvested shares are worth pennies, locking in near-zero ordinary income tax.  Otherwise, they’d have to pay income taxes on the amount vested each year.

With the 83(b) election, all the future appreciation gets taxed at the 20% capital gains rate IF and when sold, instead of the 37% ordinary income rate.

Here's how it works: You receive unvested stock or stock options or restricted stock when the company is worth almost nothing.  You immediately pay income tax on that almost-nothing value for the entire amount of stock (even though it’s not vesting for years).  Years later, when the stock is worth millions, you only pay the lower capital gains rate on the appreciation.

But there’s more: you can then (a) avoid paying capital gains taxes altogether with the QSBS rule, or (b) defer capital gains taxes indefinitely by borrowing against your appreciated shares instead of selling them to fund your expenses.

A - QSBS + 83(b) — the Early‑Stage Tax Shield

Qualified Small Business Stock (QSBS) lets any non‑corporate shareholder who buys stock directly from a US C‑corp while the company’s assets are ≤$50M exclude up to the first $10M of gain from federal capital‑gains tax. Hold the shares at least three to five years, make sure the company stays in an active trade or business, and the gain can be 0% federal tax.

Founders and early employees typically receive low‑value restricted shares, so they boost the benefit by filing an 83(b) election within 30 days of the grant. That election lets them pay ordinary tax today on pennies per share, starts the QSBS clock immediately, and moves all later appreciation into the potential tax‑free zone.

Cash investors – angels, friends‑and‑family, or VC funds set up as partnerships – don’t need an 83(b); their purchase price is already fixed. As long as they get the stock at original issue (not in a secondary sale) and meet the holding period, they qualify for the same exclusion.

Because C‑corp dividends are hit twice (21% at the company, and up to 23.8% when distributed as dividends), savvy owners and early investors let profits pile up inside the business instead of paying them out. Retained earnings boost the eventual sale price, and the gain rides under the QSBS umbrella while the corporate tax has already been paid. The playbook: draw a lean salary, reinvest cash, satisfy the holding period, and convert what would have been a 23.8% tax into 0% on the first $10M of upside.

B - Buy-Borrow-Die Strategy

Instead of selling appreciated assets to fund their lifestyle (which would trigger capital gains taxes), they borrow against their assets.

Here's how it works: You own $10 million in appreciated stock. Instead of selling $500,000 worth to fund your annual expenses, you go to a bank and borrow $500,000 using your stock portfolio as collateral.

You don't pay taxes on the borrowed money (debt isn't income), though you do pay interest to the bank.  However, in the meantime, your assets continue growing tax-free.  As long as your assets are growing by more than the interest you pay to the bank, you’re earning more than you spend AND you avoid capital gains taxes.

Then, when you die, those assets pass to your heirs with a "stepped-up basis" so your capital gains get wiped out.

Stepped-Up Basis Magic

When you die, your heirs receive your assets with their cost basis "stepped up" to current market value.  This means that decades of capital gains simply disappear for tax purposes.

If you bought stock for $100,000 that's now worth $1 million, your heirs inherit it as if they paid $1 million for it.  If they sell immediately, they owe zero capital gains taxes on your $900,000 gain.

This provision makes the buy-borrow-die strategy incredibly powerful for wealthy families.

Whole Life Insurance as a Tax Haven

Wealthy families also use whole life insurance policies as sophisticated tax-planning vehicles.  These policies offer triple tax advantages:

First, the cash value grows tax-deferred – you don't pay taxes on income or gains inside the policy.

Second, you can borrow against the cash value without triggering taxes.  Effectively, you have your own bank that can lend to you at any time.  Most insurers let you borrow up to 90% of your cash value.  The borrowing rate is slightly cheaper than a securities-backed line of credit or HELOC.  But perhaps the best part is that the loan requires no credit check or underwriting (the painful process where you submit tons of documents and you go back and forth with a bank for a month), so you can access your cash value in days, not weeks.

And third, the death benefit passes to heirs completely tax-free.  With estate tax exemptions currently at $14 million per person, double that amount for a married couple (reverting to $7 million per person in 2026), wealthy families use life insurance to transfer additional wealth beyond these limits without paying estate taxes that can reach 40%.

The federal estate tax is a progressive tax rate that starts at 18% and goes to 40% for an inheritance greater than $1 million above the exemption. [Estate tax rates]  The exemptions sound very high but think about any real estate you may own, and how much it could be worth 20-30 years from now… 

For further reading, see also: How life insurance provides 3 distinct tax benefits, Mass Mutual

Premium Financing: Leveraging Insurance for Maximum Impact (and risk!)

The ultra-wealthy take this strategy even further through premium financing – essentially borrowing money to pay for massive life insurance policies.  Instead of paying $1 million annually in premiums out of pocket, they borrow the premium payments using the life insurance policy itself as collateral.

This allows them to obtain death benefits of $20+ million without tying up significant liquid assets.  The borrowed funds pay the premiums, while the policy's cash value and death benefit grow.  When structured properly, the policy's internal rate of return should exceed the borrowing costs, creating leveraged tax-free wealth transfer.

The strategy works for the wealthy because they can preserve their liquidity for other investments while still creating tax-free death benefits for their heirs.  It's particularly powerful in low interest rate environments when borrowing costs are cheap relative to policy returns.

However, premium financing requires careful ongoing management and carries risks if policy performance disappoints or interest rates rise significantly.

If you wanted to mimic some of the strategies used by the ultra wealthy, consider the following (with careful planning and the help of professional advice):

Prioritize capital gains over ordinary income.  If you have a choice, don’t need the cashflow, and can handle the risk of stock going to zero, consider receiving unvested stock or stock options, where you may be able to claim an 83(b) election.

Hold on to assets instead of selling them by taking out collateralized loans against them.

Consider tax-advantaged life insurance if you're in high tax brackets and have maximized other retirement savings vehicles.

Focus on advisor quality. A skilled advisor who understands tax optimization can add significant value even if you can't access exclusive investments.

Disclaimer

This newsletter is for informational and educational purposes only and should not be construed as personalized financial, tax, legal, or investment advice. The strategies and opinions discussed may not be suitable for your individual circumstances. Always consult a qualified financial advisor, tax professional, or attorney before making any decisions that could affect your finances. While we strive for accuracy, we make no representations or warranties about the completeness or reliability of the information provided. Past performance is not indicative of future results. All investments involve risk, including the possible loss of principal. The publisher, authors, and affiliated parties expressly disclaim any liability for actions taken or not taken based on the contents of this publication.