Help clients manage tax liabilities using an SBLOC

Key takeaways:

• Clients should avoid liquidating assets to cover tax liabilities to prevent additional capital gains taxes and disruption of long-term financial strategies.
• You can help clients navigate tax season with confidence by providing alternative solutions to address tax liabilities.
• An SBLOC gives access to funds without selling investments, maintaining portfolio growth and financial plans.

01/07/2025 — As a financial professional, you understand that tax season can be a challenging time for your clients, especially those facing significant tax liabilities. The instinct to liquidate assets to cover these liabilities can often lead to unintended consequences, such as capital gains taxes and disruption of long-term financial strategies. We want to help you guide clients through these challenges as you offer solutions that align with their financial goals.

The challenge: Tax liabilities and asset liquidation

Clients with substantial tax liabilities may feel pressured to sell investments to meet their obligations. These tax liabilities can arise from various sources, such as income taxes, property taxes, estate taxes and self-employment taxes. For instance, high-income earners might face significant income tax bills, while property owners could be burdened with hefty property taxes. Additionally, individuals who inherit large estates may encounter substantial estate taxes, and self-employed individuals often have to manage both income and self-employment taxes.

However, selling investments to cover these liabilities can trigger capital gains taxes, further increasing their overall tax burden. For example, if an investor sells a long-held stock that has appreciated significantly, they may incur a large capital gains tax. This can be particularly challenging if the sale pushes them into a higher tax bracket.

Moreover, liquidating assets can disrupt their investment strategy, potentially affecting portfolio growth and future financial security. Selling off investments prematurely can lead to missed opportunities for growth and may result in a less diversified portfolio. This disruption can undermine long-term financial goals, such as retirement planning or funding education expenses.

Potential solutions

Instead of advising clients to liquidate their assets, consider these alternative strategies that can help manage tax liabilities more effectively:

1. Installment agreements with the IRS:

The IRS offers installment agreements that allow clients to pay their tax liability over time.

• Advantages: This option can ease the immediate financial burden and provide clients with more time to manage their finances.
• Considerations: Interest and penalties may apply, so it's important to review the terms and ensure that clients can meet the payment schedule.

2. Home equity line of credit (HELOC):

A HELOC allows clients to borrow against the equity in their home.

• Advantages: This can provide a flexible source of funds at potentially lower interest rates compared with other types of loans.
• Considerations: Clients must manage this debt responsibly to avoid risking their property.

3. Personal loans:

Personal loans can be used for various purposes, including paying off tax liabilities.

• Advantages: These loans can be relatively quick to obtain and may offer fixed interest rates and repayment terms.
• Considerations: Interest rates can vary widely based on the client's credit score and financial situation, so it's important to shop around for the best terms.

4. Securities-backed line of credit (SBLOC):

An SBLOC allows clients to borrow against the value of their investment portfolio without selling their securities. This provides access to needed funds while keeping investments intact.

• Advantages: Clients can avoid immediate tax consequences from asset sales and continue to benefit from potential portfolio growth. This strategy helps maintain their long-term financial plan.
• Considerations: It's crucial to discuss the risks, such as the need for additional collateral if the portfolio value drops, and ensure that clients understand the terms of the loan.

 Guiding clients to informed decisions 

As a trusted advisor, it's essential that you help clients make informed decisions that align with their financial goals. Here are a few steps to consider:

• Consultation: Encourage clients to consult with you to evaluate their options and choose the best strategy for their needs
• Education: Ensure that clients fully understand the terms and conditions of any loan or credit line they consider
• Long-term impact: Discuss how each option will affect their long-term financial goals and overall financial health

Managing tax liabilities doesn't have to mean disrupting a client's financial strategy or incurring additional taxes. By exploring alternatives such as securities-backed lines of credit, you can help clients find solutions that fit their needs and maintain their financial stability. With the right approach, you can help them navigate tax season with confidence and keep their financial goals on track.