If you think the U.S. tax system is complicated, you’re not alone.

Scott Galloway, a professor of marketing at the NYU Stern School of Business, believes the complications are due to various loopholes designed to help wealthy people.

“The tax code has grown from 400 to 4,000 pages, and those extra 3,600 pages are designed to make rich people super rich,” he told Steven Bartlett in a recent episode of his podcast “The Diary Of A CEO.” “Tax avoidance is a key skill in building wealth.”

One of the many tax loopholes, according to Galloway, is the use of securities-backed lines of credit (SBLOCs). He said when wealthy people want to buy something, they borrow money against their capital investments, such as stocks and bonds, rather than selling them. This allows them to avoid paying capital gains taxes on the increase in value of their investments.

In fact, this loophole could allow some people to avoid taxes permanently. “Basically, it’s like this: invest, borrow money on it and die, put it in a trust and then pass it on to the kids,” he said.

This tool can be used by anyone who has the required minimum holdings of stocks, bonds and mutual funds in a fully paid cash account with a broker. According to FINRA, it’s not uncommon for a firm to require your assets to have a market value of $100,000 or more to qualify. The first withdrawal on an SBLOC would also have to meet certain minimum requirements. Your interest rate on the loan will be based on the amount of assets you have with the firm.

The average investor should weigh the pros and cons of this maneuver before making a large investment. Here are some of them:

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The biggest benefit of an SBLOC is that it provides you with liquidity without creating a taxable event. It’s also a revolving line of credit, meaning you can pay the loan back and borrow against your assets again. According to FINRA, you can typically borrow between 50% and 95% of the value of the assets in your investment account.

In other words, you can access your assets without paying capital gains taxes. You may also be able to continue to enjoy the benefits of your assets – such as dividends or interest – and use the asset’s cash value for other purposes.

According to the New York Times, Elon Musk, for example, has pledged around 238 million Tesla shares out of his 411 million to finance his various ventures. If he were to sell millions of shares, he would have to pay billions in capital gains taxes.

According to FINRA, interest rates on SBLOCs are often lower than other forms of debt, such as personal loans and credit cards. Depending on your tax bracket, the interest could also be lower than the capital gains tax you would have paid if you sold the assets. Depending on the lender and your personal net worth, you could also have favorable flexible repayment terms.

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However, this financial instrument is not without disadvantages.

Disadvantages

In many ways, an SBLOC is similar to a home equity line of credit (HELOC). Both forms of revolving credit are relatively less expensive because they are secured by the value of an underlying asset.

This means that if you don’t make your interest payments on time, the lender can seize your assets, whether it’s a house with a HELOC or stocks with an SBLOC. There are also limits on how much of the market value of your collateral you can borrow.

Another factor to consider is market risk. The stock market is volatile and if a sudden market crash pushes the value of your assets below a certain threshold, the lender could require a cash payment to cover the difference or more collateral. According to FINRA, the company may sell some or all of your securities if you are unable to repay the required portion of the loan or provide the additional collateral.

Borrowers are also subject to interest rate risk. SBLOCs are floating rate debt, meaning the interest rate changes over time and you may end up paying higher interest than expected.

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Lending your stocks is an attractive tax minimization strategy, but in many ways this tool is better suited to high net worth individuals who have excess cash and a well-diversified portfolio of different assets to mitigate downside risks.

For individuals in a lower tax bracket who have less cash and assets at a brokerage firm, the risks may outweigh the benefits of this strategy.

This article is for informational purposes only and should not be construed as advice. It is provided without warranty of any kind.