Don't Repay Debt You Don't Have To: Pledged Borrowing and Passing Assets On (Buy-Borrow-Die)

In 30 seconds: The real power of a PAL (pledged asset line) is “don’t repay debt you don’t have to” — better to keep a debt and a big cash pile than rush to pay the loan off and be left with nothing on hand. Whether you survive “fire + job loss + crash at the same time” depends on liquidity, not on “owing little.” Going further: when you die, your heir uses their own pledge line to pay off your PAL and inherits the shares without selling — the assets get a step-up basis (near-zero capital gains tax) and keep compounding into the next generation.¹

Don’t repay, because liquidity is what keeps you alive

James contrasts two people (each with a NT$30M house):¹

	A (repays aggressively)	B (borrows out the equity)
Debt	owes only NT$2M	owes NT$15M
Cash / stocks on hand	almost none	NT$13M
Fire + earthquake + job loss at once	house burned, nothing to sell, no salary to repay → instant bankruptcy	has NT$13M → rents, job-hunts, solves it over 10+ years

Same logic with stocks (both hold NT$30M): A is 100% invested with no cash; B keeps 30% cash via pledging. When the market drops 80% and they lose their job and the house collapses, A has only NT$6M left and must sell low to live; B doesn’t have to sell, waits for the recovery, and 30% cash lasts 10+ years.¹

Conclusion: “don’t repay debt you don’t have to” is actually the safest. Same logic as 15 years of cash flow and the three lines of defense — what withstands risk isn’t low debt, but still having cash flow at the worst moment.

Why never repay: the bigger the assets, the more you can spend each year

Repaying shrinks your asset base, and your living expenses are “assets × withdrawal rate” — a smaller base means less to spend:²

Start with NT$1M assets, draw 2% = NT$20k/yr. A few years later assets grow to NT$5M (including the NT$1M you pledged), 2% = NT$100k/yr.
If you repay that NT$1M debt, assets fall to NT$4M, and 2% = only NT$80k/yr.
Don’t repay: NT$5M × 2% = NT$100k/yr; repay: NT$4M × 2% = NT$80k/yr. Repaying costs you NT$20k a year — “the bigger the assets, the more you can spend,” so don’t repay if you don’t have to. (Autopilot version: borrow 2% of a 433 allocation every year from the start and never touch it; when assets grow and you want to raise the draw, first set aside twice the debt as cash, then rebuild 433.)²

From the bank’s point of view: it’s happy for you not to repay

Why can a stock pledge be perpetual while a personal loan or mortgage can’t? Look at the bank’s risk:²

Stock pledge: if you don’t repay, the bank/broker can sell the stock immediately and never takes a loss — stock is a highly liquid, safe collateral. So the bank is happy for you not to repay: repaying actually raises its cash inventory and drags on its results. When you borrow, you’re the bank’s big customer.
Personal loan: based on your credit rating, capped at a few years; the bank doesn’t know if you’ll still have credit, a job, and steady cash flow later, so the line gets discounted.
Mortgage: a house ages and depreciates and can be damaged; a 30-year-old house is a bad deal for the bank, so it makes you repay both principal and interest.

This is also why a member Xin borrowing order puts the stock pledge last, as a long-term cash-flow tool: it’s the only loan you can “never repay.”

When to start pledging

Once your assets are large enough to pledge, you should start as early and as much as possible, so assets don’t shrink and can even keep growing. James’s rough thresholds:¹

Taiwan: at least NT$10M
Mainland China: ¥2.5M+; or Hong Kong HK$1.5M
US: an investment account of US$800k+

Hit it and start early. If you don’t pledge, cash is your emergency fund; if you do pledge, start by keeping 30% of the pledged assets in cash, so an 80% drop doesn’t get you liquidated (see the “pledge ≤ 20%” and cash cushion in the three lines of defense).¹

Passing it on: how PAL inheritance works

Using the US Schwab PAL (Pledged Asset Line): what happens to the pledge debt after you die depends on whether the heir was already on the PAL:¹

Already a borrower / trustee / authorized agent (e.g. Joint PAL, Revocable/Irrevocable Trust PAL, Entity PAL) → they can reregister or do a replacement PAL to take over the loan, without selling stock.
Only a beneficiary, not on the PAL document → they can’t directly inherit the PAL; Schwab requires paying it off first, then closing the PAL account. Two paths then:
1. Sell some of the inherited securities to repay the PAL — because an estate gets a step-up basis (cost reset to the date-of-death price), selling immediately usually has almost no capital gains tax; reinvest the rest (at the new basis).
2. The better way: the heir borrows on their own pledge line to pay off the deceased’s PAL, then inherits all the securities without selling — the position doesn’t shrink to repay debt, and keeps compounding.

This is buy-borrow-die: buy, live off pledged borrowing, and hand it to the next generation at the end. The prerequisite is that the next generation has enough pledgeable assets of their own — which comes back to the most fundamental thing: have you done a good job on your children’s financial education, or they may not be willing to pledge-borrow to pay the estate tax and the debt.¹

⚠️ A deadly trap: step-up basis applies only to “US-jurisdiction” assets

Step-up basis is the tax linchpin of the whole buy-borrow-die scheme, but it has a boundary many people don’t know — it applies only to assets under US (IRS) jurisdiction (00552):³

A US tax resident inheriting “non-US-jurisdiction” overseas assets (an overseas house, stock) gets NO step-up basis. When the heir later sells, capital gains are computed from the decedent’s original cost basis — possibly a low cost from decades ago — producing very high capital-gains tax.
In other words: stock in your US account gets a step-up when you die, nearly tax-free; but a house or stock you keep overseas (e.g. in your home country) burdens your US heir with decades of appreciation tax.
Practical takeaway: overseas assets you intend to leave to a US tax resident are best converted to “cash” first. Cash has no unrealized appreciation and avoids this capital-gains trap. (For non-US persons avoiding US accounts entirely, see UCITS-ETF-非美國投資人 and 美國退休帳戶只提撥Roth.)³

Real estate can skip probate too: the TOD (Transfer on Death Deed)

Securities pass down via PAL + step-up basis; a US house can use a TOD (Transfer on Death Deed) to skip the hassle of probate (遺產認證), passing directly to your children when you die. 00292 covers the practicalities:²

Benefits: many states offer TOD; with it you avoid probate, and at transfer there’s no US estate/gift/capital-gains tax event — the house goes straight to your kids.
Fully controllable while alive: beneficiaries have no rights to the house while you’re alive — they can’t pledge it, and you needn’t fear coercion; to change it, just re-file a TOD to revoke the old one.
How to file: from the county where the property sits, download the “revocable transfer on death deed” form; each owner files one (spouses each file, usually naming each other first, then the children); write beneficiaries’ full names and relationships (not just “eldest son”); state the shares clearly (rules vary — some states require equal shares); the property description must exactly match the original Deed; after notarizing, record it at the county Record Office.
Pitfalls: don’t simultaneously have a will, put the same property in a Living Trust, AND file a TOD — conflicts jam the transfer, so use only one. Also, after transfer the house may need to sit for a while until potential creditor claims clear before it can be sold.

🔑 TOD solves the probate hassle, a different axis from step-up basis (which saves capital-gains tax) — one saves process, one saves tax; they combine (house via TOD, securities via PAL inheritance).²

⚠️ This describes advanced leverage and cross-generation tax planning, in a US Schwab PAL / step-up-basis context; pledge ratios, liquidation terms, and inheritance-tax rules vary enormously by place — education only, not personalized investment, tax, or legal advice. Any pledge can be called or liquidated in a big drop; understand pledged loans and the three lines of defense first, and consult local tax/legal professionals on inheritance arrangements.

CLEC James, 00566 “The real power of PAL: don’t repay debt you don’t have to; let assets pass down a generation,” opening talk and slides, 2026-05-23. Transcript (with timestamps): raw/transcripts/長篇/00566…; slides “PAL inheritance / A-vs-B / pledge thresholds”: raw/docs/簡報資料/00566…. ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶ ↩⁷
CLEC James, long session 00292 ”…US Real-Estate TOD to Avoid Probate…,” 2022-01-28, TOD deed practicalities @26:00–30:30. No corresponding deck for this session; transcript at raw/transcripts/長篇/00292…. TOD rules vary by state; educational reference only, not legal advice — check your state’s rules and consult a local professional before acting. ↩ ↩² ↩³ ↩⁴ ↩⁵
CLEC James, 長篇 00552 “The deadly risk you don’t know about… taxation, inheritance, and wrong allocation,” 2026-02-07, step-up basis applies only to US-jurisdiction assets; a US person inheriting overseas assets gets no step-up; best inherited as cash. Matching deck page in raw/docs/簡報資料/00552… (“US tax residents inheriting overseas estates get no cost-basis step-up… best to inherit non-US persons’ overseas assets as cash”). Transcript in raw/transcripts/長篇/00552…. ↩ ↩²