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From 'buy, borrow, die' to backdoor Roths: 9 tax tricks the wealthy use legally

Michael Kurko and Kelly Suzan WaggonerDecember 22, 2025 at 5:38 PM

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From 'buy, borrow, die' to backdoor Roths: 9 tax tricks the wealthy use legally (tazytaz via Getty Images)

Admit it: Every time you read about the wealthy “avoiding taxes,” you assume something shady must be going on. Offshore accounts, secret shell companies or some “creative accounting” that borders on fraud.

The truth is far less dramatic and more revealing. Between 2014 and 2018, the 25 wealthiest Americans saw their fortunes grow by $401 billion while paying just $13.6 billion in federal income taxes, according to ProPublica’s analysis of IRS data. That’s an effective tax rate of 3.4% — lower than what you’re likely paying.

High-net-worth individuals aren’t relying on hidden loopholes. They’re relying on planning and tax rules most people are never taught to use. All are legal strategies built directly into the tax code. Some are available to everyday earners, while others only work at higher levels of wealth. Understanding how they operate helps explain why money compounds faster at the top. And which strategies, if any, the rest of us can borrow.

⭐️ Must read: 13 big tax changes coming in 2026 that could boost (or shrink) your refund

1. The “buy, borrow, die” strategy

One of the most powerful wealth strategies has nothing to do with income. It’s about avoiding taxable events entirely.

Rather than selling appreciating assets like stocks or real estate, wealthy individuals often borrow against them. Because loans aren’t considered income, there’s no immediate tax bill. Their assets continue to grow, and the borrowed funds cover spending, investing or lifestyle expenses.

When the owner dies, heirs receive a step-up in cost basis — meaning capital gains taxes on decades of appreciation are fully erased. Outstanding loans get paid off from the estate, often by selling some assets at their new, stepped-up value with little or no tax owed.

This strategy isn’t fully accessible to most households, but it explains why ultra-wealthy individuals live large and fly private while reporting relatively little taxable income.

🔍 Read more: The rich can now write off a jet in full. Don’t you deserve one too?

2. Donor-advised funds: Deduct now, give later

Donor-advised funds (DAFs) are charitable accounts that let you claim an immediate tax deduction now while deciding later which charities will receive the money.

Here’s why they’re popular: Say you have an unusually high-income year — maybe from a bonus, a stock sale or exiting a business. You can dump that money into a DAF that year, take the full tax deduction and then distribute the funds to charities over time. Meanwhile, assets invested in the DAF grow tax-free, potentially giving you even more to donate.

DAFs are often associated with higher earners, but the minimums are surprisingly accessible. Many sponsoring organizations like Fidelity and Charles Schwab accept initial contributions as low as $5,000 — and some as low as $1,000 — making them among the more obtainable planning tools on this list.

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3. Like-kind exchanges: Trade up, defer taxes

Section 1031 exchanges are a cornerstone of real estate investing, allowing owners to swap properties without paying capital gains — at least not immediately, and sometimes not for decades.

The strategy is simple: sell one property, buy another of equal or greater value and kick the tax bill down the road. Over time, that money you didn’t send to the IRS keeps working and compounding in each new property, often producing much larger gains than if you’d paid taxes at each sale.

Today, like-kind exchanges apply only to real estate, making them a powerful yet narrow tool for the wealthy — one that works great if you’re trading apartment buildings, less so if you flip cars or collectibles.

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4. Grantor retained annuity trusts: Growth to heirs tax-free

Grantor retained annuity trusts (GRATs) are a common estate-planning strategy for wealthy families looking to transfer appreciating assets without triggering large gift taxes.

Here’s how it works: You place assets into a trust and receive regular payments back over a set period — say, two to 10 years. Those payments are calculated based on a government-set interest rate. If your assets grow faster than that rate, the extra growth passes to your heirs, largely tax-free.

The strategy works best with assets expected to outpace the IRS rate by a wide margin — things like private company shares. Because the margins matter and the rules are strict, GRATs are typically used by founders, executives and families with large stock holdings, rather than everyday investors.

🔍 Read more: Saving vs. investing: How they differ for growing and protecting your wealth

5. Backdoor and mega backdoor Roth strategies

Roth accounts offer one of the cleanest tax benefits available: tax-free withdrawals in retirement. But income limits keep many higher earners from contributing directly. In 2025, that cutoff starts at $150,000 for single filers and $236,000 for married couples, increasing to $153,000 for singles and $242,000 for couples in 2026.

Enter the backdoor Roth strategy. You contribute to a traditional IRA (which has no income limits) and then convert it to a Roth IRA. You’ll owe taxes on the conversion, but once the money’s in your Roth, it grows tax-free.

The “mega backdoor” takes it a step further. If your employer’s 401(k) plan allows after-tax contributions beyond the standard limits, as corporate plans increasingly do, you can funnel even larger sums into a Roth each year.

Both are legal and established strategies but require the right accounts and careful execution to avoid tax hits. And they’re increasingly popular among higher earners with access to sophisticated retirement plans. So not available to everyone, but also hardly rare.

🔍 Read more: Roth IRAs: What they are, how they work and how to open one

6. Business ownership: Deductions employees can’t touch

Owning a business opens up a set of tax strategies that employees simply can’t access, no matter how much they earn..

Let’s start with deductions. Business owners can write-off expenses tied to generating income — things like home office space, business travel, client meals, software subscriptions and vehicles used to get to and from appointments. They can choose how their business is taxed (think: LLC, S-corp, C-corp), and they can time income and expenses strategically — delaying invoices into January or accelerating buys in December to manage taxes.

Retirement contributions offer even wider gaps. While employees max out at $23,500 in a 401(k), business owners with solo 401(k)s or SEP IRAs can often contribute $60K or more each year. And if they sell a successful business, strategies like stock exclusions and installment sales allow them to further shelter their gains.

None of this eliminates the risk, long hours or uncertainty of running a business. But it helps explain why business ownership remains one of the most effective wealth-building plans available.

🔍 Read more: 6 steps to starting a consulting business in retirement

7. Private placement life insurance: Investing for the ultra-wealthy

Private placement life insurance (PPLI) wraps investments — stocks, hedge funds, even private equity — inside a specialized life insurance policy. Because it’s technically insurance, the assets grow tax-deferred and, if structured correctly, you can borrow against the policy’s cash value without triggering taxes (kinda like our first “buy, borrow, die” strategy).

The catch is access — and it’s a big one. Regulatory requirements limit PPLI to accredited investors, and most providers require steep minimums between $1 million and $5 million just to get started. Setup costs alone can run $50K to $100K in legal and advisory fees.

This puts PPLI squarely in high-net-worth territory: family offices managing nine-figure portfolios, not successful professionals with healthy 401(k)s. But for those who can access it, PPLI offers a level of tax optimization few strategies can match.

🔍 Read more: What happens if you outlive your term life insurance policy? 4 key options

8. Charitable remainder trusts: Income for you, charity later

Charitable remainder trusts (CRTs) let you place assets into a trust that pays you income for a set period with whatever’s left going to a charity when the trust ends.

CRTs offer significant tax benefits: You get a partial tax deduction upfront based on the estimated value that will eventually reach that charity. And if you fund the trust with appreciated assets, like that stock you bought decades ago, you avoid the capital gains tax you’d normally owe if you sold them directly.

The strategy is especially popular with retirees who hold highly appreciated stock or real estate and want to convert it into steady income without triggering a large tax bill. Say you own $2 million in stock you bought for $200,000. Sell it outright, and you’ll owe hundreds of thousands in capital gains. Put it in a CRT, and the trust can sell it tax-free then invest the full proceeds to generate predictable income for life or a fixed number of years.

🔍 Read more: Private jets, pools and pups: 7 wild tax deductions the IRS actually allows

9. Family limited partnerships: Discounted wealth transfers

Family limited partnerships (FLPs) allow families to pool assets — real estate, business interests and other investments — under a single partnership structure that makes it easier to transfer wealth across generations at a discount.

Here’s where that discount comes from: Parents maintain control of the FLP as general partners, gifting minority interests to their children or other heirs. Because those minority stakes come with no control over the partnership and can’t be sold to outsiders (at least not easily), the IRS allows them to be valued at 20% to 40% below what they’re actually worth.

If the family partnership owns $10M in assets, a 10% stake should be worth $1M. But it can be valued at just $700,000 when calculating gift tax. That $300K discount means families can give away more total wealth to their kids without the IRS taking a cut.

FLPs require careful legal setup, annual valuations and strict compliance, and the IRS scrutinizes them closely. But they remain a staple in estate planning for families with substantial assets to pass down.

🔍 Read more: 7 best low-risk investments for retirees

Bottom line: Wealth compounds faster when you know the code

The wealthy don’t avoid taxes by breaking the rules. They hire teams of CPAs and estate planners to apply them strategically, year after year.

And they aren’t a secret: These strategies are written directly into the tax code, often to encourage people to invest in real estate, start businesses, donate to philanthropic causes and save for retirement. The difference is that high-net-worth households benefit more because they structure their lives around maximizing these benefits.

Not every strategy translates down to every household. You probably can’t fund a $5 million private placement life insurance policy or set up a family limited partnership. But backdoor Roths, donor-advised funds and strategic use of business deductions are increasingly accessible to everyday earners who know how to ask for them.

The catch is that most of these require setup to avoid triggering penalties or unexpected tax bills. A CPA or trusted financial advisor can help you determine which strategies fit your specific situation — and execute them correctly.

In the end, taxes aren’t only about income. Understanding how the system actually works helps explain why wealth compounds faster at the top. And, hey, it might reveal at least a few worth borrowing.

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About the writer

Michael Kurko is a finance writer and editor who covers investing, real estate, personal budgeting and financial literacy. His expertise has been featured in FinanceBuzz, The Balance, Investopedia, U.S. News & World Report and Forbes Advisor, among other top financial publications. In addition to his work in finance, Michael is also a freelance book editor and fiction writer. He strives to make complex money topics clear and approachable so readers can make informed decisions and build lasting financial confidence.

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