Using Debt Strategically as Part of a Wealth Plan

Many individuals and families build wealth through long-term assets such as investment portfolios, real estate, business interests or retirement savings. While these assets may support long-term growth, they are not always easy to access quickly.

That can create a challenge: What happens when you need liquidity, but much of your net worth is tied up in investments or property?

In some cases, selling assets may be the right decision. But selling can also trigger taxes, interrupt an investment strategy or reduce future growth potential. Another option may be to borrow against certain assets instead.

Used thoughtfully, asset-backed borrowing can help manage short-term liquidity needs while keeping a long-term plan intact. However, it is not without risk. Market volatility, variable interest rates and repayment obligations can all create pressure if the strategy is not managed carefully.

Here are several situations where borrowing against assets may be considered — and what to evaluate before doing so.

Paying a Tax Bill

A large tax bill can create a liquidity challenge, especially if much of your wealth is invested or tied up in a business, real estate or other long-term assets.

Selling investments to pay taxes may create additional tax consequences, including capital gains. In some situations, borrowing may provide a way to meet the tax obligation without selling assets immediately.

For example, an individual who sells a business interest, receives a large bonus or realizes significant investment gains may owe taxes before they want to liquidate other holdings. Borrowing against a home equity line of credit or a securities-based line of credit could provide temporary liquidity while allowing other assets to remain invested.

That said, this strategy should be handled carefully. Borrowing against an investment portfolio may create risk if the market declines and the value of collateral falls. Borrowing against home equity uses the home as collateral, which means missed payments could put the property at risk.

Potential options to consider

• Home equity line of credit
• Securities-based line of credit
• Other short-term lending strategies, depending on the situation

Planning consideration

Before borrowing to pay taxes, make sure there is a clear repayment source. A loan may help solve a timing issue, but it should not create a longer-term debt burden that weakens your financial plan.

Taking Advantage of an Investment Opportunity

During periods of market volatility, some investors may see opportunities to purchase additional investments while valuations are lower. Borrowing through a margin loan can provide access to funds without requiring an immediate sale of other assets.

However, using borrowed money to invest adds risk. If the investment declines, losses can be amplified. If the value of the account falls below required levels, the lender may issue a margin call and require additional cash, additional securities or the sale of investments.

Margin can be a flexible tool, but it is generally most appropriate for experienced investors who understand leverage, market volatility and the rules of margin borrowing.

Potential option to consider

• Margin loan through a brokerage account

Planning consideration

Borrowing to invest should be evaluated against your investment philosophy, risk tolerance and ability to withstand market declines. It should not be used simply because credit is available.

Purchasing Real Estate

Asset-backed borrowing may also be used to help manage the timing of a real estate transaction.

In competitive housing markets, some buyers use a line of credit secured by investments or home equity to make a stronger offer or bridge the gap between buying a new property and selling an existing one. This can provide flexibility when timing is uncertain.

For example, a buyer may use short-term borrowing to purchase a new home, then repay the loan after selling another property or refinancing into a traditional mortgage.

This can be helpful, but it should not be treated as a long-term financing solution by default. Many asset-backed loans have variable interest rates, and there is no guarantee that refinancing will be available later on favorable terms.

Potential options to consider

• Home equity line of credit
• Securities-based line of credit
• Margin loan, depending on the purpose and lender rules

Planning consideration

If borrowing is used as bridge financing, the exit strategy matters. Know how and when the loan will be repaid, and consider what happens if the home sale, refinance or other expected event is delayed.

Managing Uneven Cash Flow

Some individuals receive a significant portion of their income through bonuses, commissions, equity compensation, business distributions or other irregular payments. In those cases, regular cash flow may not always align with expenses or major planned purchases.

Asset-backed borrowing can sometimes help smooth short-term cash flow needs without forcing the sale of investments or company stock.

This may be useful for large, planned expenses such as home improvements, education costs, tax obligations or major purchases. However, it should not be used to support a lifestyle that regular income cannot sustain.

Potential options to consider

• Home equity line of credit
• Margin loan
• Securities-based line of credit

Planning consideration

Borrowing may help manage timing, but it should not replace a sustainable spending plan. If debt is being used repeatedly to cover normal expenses, that may be a sign that the broader financial plan needs to be revisited.

Common Asset-Backed Borrowing Options

Depending on your assets, goals and risk tolerance, several lending options may be available.

Understand the Risks Before Borrowing

Asset-backed borrowing can create flexibility, but it should be managed with discipline.

Before using assets as collateral, consider:

• What is the purpose of the loan?
• Is the need short-term or long-term?
• What is the expected repayment source?
• What happens if interest rates rise?
• What happens if investment values decline?
• Could this strategy create tax consequences?
• Would selling assets be simpler or lower risk?
• Does the loan support or weaken the broader financial plan?

Margin loans and securities-based lines of credit are especially sensitive to market changes. If the value of pledged assets declines, available credit may shrink and you may need to add collateral or repay part of the loan. In some cases, assets may be sold to satisfy lender requirements.

With a HELOC, the risk is different but still important. Because the loan is secured by your home, missed payments may have serious consequences.

Review the Strategy Regularly

A borrowing strategy should not be set once and ignored. Interest rates, investment values, cash flow, tax rules and personal circumstances can change.

It is important to regularly evaluate whether the loan still makes sense. If borrowing costs rise, if collateral values decline or if repayment becomes less certain, the strategy may need to be adjusted.

The goal is not simply to access credit. The goal is to use debt, when appropriate, in a way that supports liquidity, protects long-term assets and aligns with your overall wealth plan.

Final Thoughts

Borrowing against assets can be a useful planning tool, especially for individuals and families with significant wealth tied up in investments, real estate or business interests. It may help provide liquidity, manage timing issues and avoid unnecessary asset sales.

But leverage should be used carefully. The same strategy that creates flexibility can also increase risk if markets decline, rates rise or repayment plans change.

Before borrowing against your assets, work with your financial, tax and lending professionals to understand the costs, risks and alternatives. A thoughtful plan can help you use debt strategically while protecting the wealth you have worked hard to build.

 

This article is for informational purposes only and should not be interpreted as specific advice. You should make decisions based on your unique objectives and financial situation. If you are unsure please work with an appropriate advisor to review your specific circumstances. Additionally, any statements made reflect our views and/or opinions and are not intended to guarantee any particular result.

Margin trading increases your level of market risk and your downside is not limited to the collateral value in your margin account. You can lose more than the value of your account and end up in a negative equity situation. The custodian holding your assets can initiate the sale of any securities in your account, without contacting you in accordance with their policies to meet a margin call. Work with your financial advisor to better understand the risks and how a margin feature would impact your financial plan.

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