Three types of debt that may boost your returns

Tab 1

March 15, 2018

One of the most compelling options a bank can offer its wealth clients is leverage: lending money to invest.


“You don’t want to be overleveraged in any way, shape or form, but leverage in moderation can be a really powerful tool,” says David Crittendon, Private Banking Managing Director for U.S. Bank Private Wealth Management.


According to Crittendon and David Mook, Chief Private Banking Officer for U.S. Bank Private Wealth Management, three types of debt in particular can help high net worth families achieve their financial goals: liquid asset secured financing, estate planning debt and home debt. Here’s how you can make the most of each.


1. Liquid Asset Secured Financing: A HELOC for Your Portfolio


A liquid asset secured line of credit is like a home equity line of credit (HELOC), except your marketable securities secure the loan instead of a home.


Crittendon says these lines typically have low interest rates because they’re low-risk — because the stocks are traded on an exchange, the bank knows exactly what the value of the collateral is at any given time.

Mook says clients often use liquid asset secured financing to generate cash flow quickly. For instance, at tax time, “If you’re not holding cash, you can liquidate investments and pay the tax bill or you can borrow against your portfolio,” Mook says, noting that liquidating investments may trigger capital gains taxes.


Crittendon says individuals with a higher risk tolerance can use liquid asset financing to possibly take advantage of interest rate arbitrage opportunities for funding investments they feel can generate a high rate of return.

Tab 2

March 15, 2018

2. Estate Planning Debt: Insurance and GRATitude


Contrary to common belief, debt can facilitate wealth transfer, Mook says, pointing to two particular estate planning strategies: life insurance and Grantor Retained Annuity Trusts (GRATs).


A life insurance policy can help pay for estate taxes after death, allowing the estate to distribute assets at a pace that maximizes the estate’s value.


However, insurance can be expensive. “If you don’t want to write a big check every year, we can finance that premium and take the cash value of the policy as collateral for the loan,” Crittendon says.


A GRAT is a trust set up for a specific time period (usually two to five years) that helps transfer assets tax-efficiently.


Over the life of a GRAT, the assets held in the trust will inevitably rise and fall. Bank financing could protect your gains and shield you from losses by allowing investors to substitute a high-growth asset with a stable one — for instance, substituting cash for stock locks in any gains in the stock value to date. If you don’t have the cash to make that substitution, a bank can lend it to you, Mook says.


3. Home Debt: Unlocking Your Equity


In addition to being a valuable asset on its own, equity in real estate can help provide liquidity.


“If your house is unencumbered, has gone up in value or has a very low level of debt on it, you can put a mortgage on it to gain additional liquidity,” explains Mook, who says you can use money from either a second mortgage or a home equity line of credit to buy a second home, renovate an existing home or purchase a commercial property. That can generate income and diversify your portfolio.


Even when interest rates are low, home debt can be a risky way to borrow. For those with risk tolerance, however, the advantages can be significant — particularly for a small business owner, who can use money from a second mortgage to help fund the business at a lower rate than what is available to the business entity.

“We want to give our clients flexibility,” Crittendon says. “By helping them utilize leverage, we can make sure they have dry powder available to seize financial opportunities when they’re available.”

Financial Planning