Show clients a less taxing way to gift assets

Key takeaways:

• To make a large gift, a client could sell securities, transfer those securities or access cash with a securities-backed line of credit (SBLOC).
• The SBLOC could be the most tax-efficient option because it avoids capital gains tax.
• This article uses a hypothetical example to demonstrate the math.

11/06/2024 — When a client wants to make a large financial gift, they may have 3 options for doing so. This can be illustrated with the hypothetical situation of a successful client named Arnold. He has built an investment portfolio of non-qualified assets worth $2 million and would like to gift $250,000 to his only child.

Option 1: Sell the securities and give the proceeds to his child.

Liquidating securities would have immediate tax implications for Arnold, and his child would lose the possibility of a step-up in basis for the liquidated securities.

Option 2: Transfer securities to his child as a gift.

Transferring the securities could have negative tax consequences for both your client and the recipient of the gift. In addition to potential gift taxes for your client, the recipient may incur capital gains taxes if the securities have appreciated in value since they were purchased.

Option 3: Borrow $250,000 by leveraging securities in his portfolio.

Opening a securities-backed line of credit (SBLOC) could offer Arnold a tax-advantageous way to make a gift to his child today while allowing him to maintain his existing investment portfolio and estate-planning strategies.

The value of an SBLOC

An SBLOC is a solution that offers a simpler way to access cash without disrupting your client’s portfolio. Using the following assumptions,¹ let’s see how using an SBLOC could have long-term benefits for Arnold and his child:

• Your client, Arnold, borrows $250,000
• The SBLOC payments are interest-only, with an interest rate of 7.55% and an annual percentage rate (APR) of 7.65%²
• Arnold retains his investment portfolio, and its value increases an average of 10.41% per annum (based on the average annual return of the S&P 500)
• The applicable capital gains tax rate is 20%; Arnold has had his money invested in the S&P for the past 10 years, yielding a cost basis of $92,863
• Arnold has available the full $12,920,000 federal lifetime gift/estate tax exemption and has made no annual exclusion gift to his child for the year³
• Arnold is unmarried and lives in a state that does not impose an estate or inheritance tax, but he has an estate that will be subject to a 40% federal estate tax
• Arnold dies 10 years after making the gift, and his child is his sole beneficiary

The SBLOC could deliver long-term benefits to Arnold and his child

SBLOCs offer benefits for financial professionals, too

Offering SBLOCs as part of your services portfolio enables you to retain assets under management rather than seeing them go to another solutions provider. And as you serve unmet client needs, you can strengthen long-term relationships and consolidate more of your clients’ business. After all, it’s always a good idea to broaden your ability to provide holistic planning to your clients.

As with most financial products, using an SBLOC involves risks

The risks include, but are not limited to, the fact that the lender may:

• Suspend and/or terminate the borrower’s line of credit
• Declare all indebtedness immediately due and payable
• Sell any collateral to maintain the line-to-value requirement
• Require additional collateral from the borrower to meet the line-to-value requirement
• Require the borrower to pay down the principal to meet the line-to-value requirement

There are persistent myths about SBLOCs being slow and complicated, but modern solutions offer a more streamlined experience. It’s possible to obtain cash within days rather than weeks and experience a smooth, 100% online process.