The Benefits of Using Strategic Finance in Estate Planning Leverage strategies play an integral part in preserving and transferring your family s wealth key points Utilizing leverage strategies can help preserve your legacy and create the efficient transfer of wealth The ability to access a range of customized credit solutions can be a vital part in the implementation and maintenance of your wealth plan Working with a credit specialist as part of your larger wealth management team may help you access capital to meet your immediate needs and provide more flexibility in funding loans 2018 Wilmington Trust Corporation and its affiliates. All rights reserved.
Many successful individuals and prominent families do not realize the full benefits of strategic financing or leverage, especially when it comes to wealth and estate planning. In fact, an estate or succession plan that includes appropriate borrowing strategies can help preserve a family s legacy and enable more efficient transfer of wealth from one generation to the next and beyond. As part of comprehensive wealth and estate planning, the potential use of leverage always begins with a careful examination of your entire balance sheet both assets and liabilities. Additional key considerations include current and future cash flows, along with ongoing liquidity needs. It is also important to keep in mind that each situation is unique. There is no one-size-fits-all approach, so every circumstance requires a customized solution. Sophisticated banking and lending For many high-net-worth individuals and families, standard banking and lending solutions do not meet the more complex needs that come with managing significant wealth. In addition to checking and money market accounts, you may need customized and often creative credit alternatives that are tailored to your specific requirements. The ability to access a range of credit solutions can be a vital part in the implementation and maintenance of your wealth plan. A dedicated credit specialist, as part of your larger wealth management team, can help you access capital to meet your immediate needs, and may have more flexibility in funding loans against your marketable securities, such as assets held in trust or estate, partnership interests, planes, boats, and commercial and residential properties. Integrating custom lending with wealth planning strategies There are many strategies that can be utilized to integrate your custom lending options with your wealth planning efforts. Some of the more commonly used include: Maximizing income tax benefits of Grantor Trust strategies. A Grantor Trust is a type of trust in which the trust owner (settlor) relinquishes ownership of the assets placed in the trust but is treated as the owner of the trust assets for income tax, deductions, and credits against tax. Creating this type of trust is a common estate planning strategy for high-net-worth individuals and families, particularly when funded with assets that have a low income tax basis relative to their fair market value. Use of this strategy may result in income and estate tax savings. Customized financing alternatives may include: Bridge Financing To help with a significant purchase or liquidity gap (such as paying estate taxes) for a short period of time Securities-Based Lines of Credit Marketable securitiesbacked lines of credit, including restricted and concentrated stock positions Specialized Asset Backed Loans Secured by partnership interests, fine art, yachts, and aircraft Residential and Investor Commercial Real Estate Securing competitive rates for primary homes, vacation and investment properties through an expedited approval process, including home equity lines of credit At Wilmington Trust, banking and lending services are provided through M&T Bank. 2018 Wilmington Trust Corporation and its affiliates. All rights reserved. page 2 of 5
A properly structured loan can be used to swap or exchange assets in a Grantor Trust, resulting in potential income tax savings. Irrevocable Grantor Trusts may be created for both tax and non-tax reasons. A few of the major benefits of creating such a trust are: 1) when you, as the settlor, make a gift or sell assets to the trust, you are allowed to pay the income taxes on the trust assets, thus allowing the assets to grow tax free; 2) such income taxes paid are not considered a gift to the beneficiaries of the trust and do not cause inclusion of the trust assets in your estate; and 3) you can swap or exchange your assets with trust assets provided the assets swapped are of equivalent value. Once the trust assets experience this tax-free growth, the income tax basis of the assets would likely be much lower than their fair market value. The result is a potentially large built-in gain, and a potentially significant income tax due when the assets are eventually sold. However, if you are able to reacquire the assets during your lifetime by swapping cash for trust assets, then the built-in gain is wiped out upon your death because the assets receive a stepped-up basis equal to fair market value. Often, if you do not have sufficient liquidity to make the swap, or prefer not to tie up all of your liquidity to do so, a properly structured loan could provide the necessary cash. This allows the strategy to be executed, resulting in potential income tax savings. The trust can use the cash inflow to then purchase a new portfolio of assets in support of the trust s objectives. Preventing fire sales of privately held businesses or other illiquid assets upon death. If you are a privately held business owner, your business interests will likely comprise a large percentage of your estate. Alternatively, you may have other significant holdings in other assets that may be difficult to liquidate quickly, such as an art collection, jewelry, other collectibles, and/or significant real estate holdings. This can be potentially problematic when you pass away, because if a large estate tax is due, insufficient estate liquidity can require the sale of some or all of these illiquid assets. In the case of a privately held business, the IRS may, in certain circumstances, grant an extension to pay the tax if a proper election is made by the personal representative of your estate. However, absent a properly accepted election, the tax liability due could force a sale of the business on a timeline that would not allow for its full value to be received. With respect to other illiquid assets, the only option may be to sell the assets under duress, often for a price that is less than desirable. A properly structured loan could provide the liquidity needed to pay the tax without subjecting the assets to a fire sale. Further, if certain requirements are met, the interest may be deducted as an estate administration expense, thus potentially creating a valuable estate tax benefit and increasing the effectiveness of this strategy. Providing liquidity when needed during life. Integrating banking and lending with your wealth management and planning strategies in a holistic way can effectively provide liquidity to manage your short- or long-term cash needs. For example, you may not want to liquidate equity positions that have experienced unrealized losses if you believe that the market will recover sufficiently over time. Also, if you own a business you may be reluctant to raise cash by liquidating securities that might be eroded by short- and long-term capital gains. Or, if you use private business interests to make gifts to a Grantor Trust (as described above), you may want to lock in those gains if the stock appreciates rapidly by swapping cash for the privately held business interests and using the cash to diversify the trust s holdings. In these examples, using customized credit solutions can provide the liquidity needed to meet the unexpected short-term needs while allowing you to pursue your long-term objectives. 2018 Wilmington Trust Corporation and its affiliates. All rights reserved. page 3 of 5
Diversifying a concentrated position by leveraging an asset. Many business owners hold concentrated positions in the business with little diversification in the assets held outside of it. In addition, particularly if you are a corporate executive, you may hold concentrated stock positions that have a low income tax basis. In either of these cases, it may make sense to borrow against the concentrated position (or its assets) in order to: 1) provide liquidity that can be invested in a diversified way, thus adding diversification to the overall asset holdings; and/or 2) provide tax-free cash flow to fund your lifestyle/income needs without requiring an asset sale. This strategy is especially effective when the income tax basis of the asset is low, and borrowing against the asset, rather than selling it in order to diversify or create cash flow, will save significant capital gains taxes. In many cases, the act of diversifying the asset holdings can make it easier to achieve strategic goals and implement other strategies to shift and protect wealth for the next generation while seeking to minimize estate and income taxes. Taking advantage of rate arbitrage to maximize wealth creation and provide capital to a business. If you are a business owner and you have a diversified investment portfolio of marketable securities as well as several operating businesses, you may wish to engage a credit specialist to provide capital for the company. One potentially attractive solution involves utilizing a strategy often implemented by a credit specialist to lend to you individually, generally using a marketable securities portfolio as collateral, in lieu of engaging a commercial bank to lend directly to the entity. Oftentimes, this approach can allow you to obtain a lower borrowing rate as opposed to using a commercial lending channel. This offers you two options: you can lend to the business at a higher rate, charging a premium for the use of your collateral; or, you can utilize the lower cost of capital to help make inexpensive loans to assist in wealth transfer strategies. Essentially, by utilizing your creditworthiness and personal assets, you are able to borrow capital relatively inexpensively and utilize that capital to further your wealth planning objectives or those of your business. Borrowing against a concentrated position can provide the liquidity you need for portfolio diversification and tax-free cash flow. Utilizing strategic financing in your wealth planning requires a customized approach based on your particular needs and circumstances, and collaboration between all members of your wealth management team, including credit specialists. With a holistic view of your entire financial picture, together they can help implement tax-efficient and effective strategies for both the short and long term. Our Private Banking* team provides strategic advice, highly personalized service, and access to M&T Bank s complete range of banking and credit solutions that align your cash flow, balance sheet, and investment management goals with your overall estate plan. We work creatively to evaluate your options and provide lending based on your unique assets including specialty or illiquid holdings. Most important, we work closely with your planning, fiduciary, investment, and insurance specialists to make sure your banking strategies are aligned with the rest of your wealth and financial plan. * Private Banking is the marketing name for an offering of M&T Bank deposit and loan products and services. 2018 Wilmington Trust Corporation and its affiliates. All rights reserved. page 4 of 5
Jonathan Fitzgerald Director of Wealth and Fiduciary Planning: Florida Wealth Advisory, Wilmington Trust, N.A. 561.514.6730 jfitzgerald@wilmingtontrust.com Jonathan is responsible for developing customized wealth management and financial plans for high-net-worth individuals and families, business owners, entrepreneurs, and foundations and endowments throughout the state of Florida. He holds a J.D. from the University of Florida Levin College of Law and a bachelor s degree in Accounting from the University of Notre Dame. Ann Silverman Group Vice President Private Banking, Wilmington Trust, N.A. 212.350.2690 asilverman@wilimingtontrust.com Ann is responsible for overseeing the Private Banking teams in New York, New Jersey, Connecticut, Delaware, Florida, and the firm s national offices in Atlanta, Boston, and Los Angeles. She holds a master s degree in Finance from Wharton and a bachelor s degree in History from Smith College. Andrew Horwitz Director of Wealth and Fiduciary Planning: Central Pennsylvania Wealth Advisory, Wilmington Trust, N.A. 717.255.2179 ahorwitz@wilmingtontrust.com Andrew is responsible for developing customized wealth management strategies and financial plans for prominent individuals, families, and business owners throughout Central Pennsylvania. He holds a J.D. from Widener University School of Law and a bachelor s degree in Health Policy and Administration from Pennsylvania State University. *Private Banking is the marketing name for an offering of M&T Bank deposit and loan products and services. This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, investment, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. Asset allocation/diversification does not guarantee a profit or protect against a loss. IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this publication is not intended to provide tax advice, in the event that any information contained in this publication is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein. Wilmington Trust is a registered service mark. Wilmington Trust Corporation is a wholly owned subsidiary of M&T Bank Corporation. Wilmington Trust Company, operating in Delaware only, Wilmington Trust, N.A., M&T Bank, and certain other affiliates, provide various fiduciary and non-fiduciary services, including trustee, custodial, agency, investment management, and other services. International corporate and institutional services are offered through Wilmington Trust Corporation s international affiliates. Loans, credit cards, retail and business deposits, and other business and personal banking services and products are offered by M&T Bank, member FDIC. Investments: Are NOT Deposits Are NOT FDIC Insured Are NOT Insured By Any Federal Government Agency Have NO Bank Guarantee May Go Down In Value 2018 Wilmington Trust Corporation and its affiliates. All rights reserved. page 5 of 5 CS18108 5/2018