Rising stocks and rocketing interest rates have given wealthy Americans a big advantage: cheap loans they can use to finance their lifestyle while minimizing their tax bill.
Banks say their high net worth clients are borrowing more than ever, often using loans backed by their equity and bond portfolios. Morgan Stanley wealth management clients have $ 68.1 billion in securities and other non-mortgage loans outstanding, more than double five years earlier. Bank of America Corp. said it has $ 62.4 billion in securities loans, eclipsing its portfolio of equity lines of credit.
The loans have special advantages beyond the flexible repayment terms and low interest rates offered. They allow borrowers who need cash to avoid selling in a hot market. Startup founders can monetize their stakes without losing control of their business. The super rich often use these loans as part of a “buy, borrow, die” strategy to avoid capital gains tax.
The simple rich also borrow from their wallets. When Tom Anderson started at Merrill Lynch & Co. in Cedar Rapids, Iowa, in 2002, many of his fellow advisers had only one or two securities loans in their portfolio of businesses. Over the years, he has encouraged more clients to borrow and has noticed that his peers are doing the same. Now, it’s common for advisers at large companies to have dozens of these loans outstanding, he said. Merrill Lynch is now part of Bank of America.
“You could buy a boat, you could go to Disney World, you could buy a business,” said Anderson, who now consults with banks on how to manage the risks associated with these loans. “The tax benefits are mind-blowing.