How can private banking complement your family’s wealth project?
Banking decisions aren’t always at the heart of wealth planning, but they should be part of the conversation.
Family wealth plans typically focus on long-term investments or complex tax strategies. Banking solutions don’t often get a lot of attention, but it’s important to look at both sides of the balance sheet and see how loans and deposits can preserve and grow wealth. Day-to-day cash management is integrated into our day-to-day operations, and the use of leverage and appropriate credit and interest rate structures can provide options for individuals and families as they transition from wealth from one generation to the next.
When does it make sense to use private banking services for these solutions? Here are a few situations where families can use banking techniques to meet immediate needs while benefiting their long-term wealth planning.
Should I borrow from a bank to continue my growth?
Creating wealth often means borrowing funds in advance to fund a potentially large opportunity. For most families, this means a bank loan and the risks (and costs) associated with it. Debt can have an impact in the right situations, but as anyone who lived through the financial crisis of 2008/2009 can tell you, debt can have its downsides.
How do you balance the potential gains against the risks? Interest cost is what matters most. When rates are low, debt can help you acquire assets you may need now. It can also help bridge the gap between anticipated liquidity events. For example, maybe you need cash to pay your taxes, but you don’t want to disrupt your investment strategy. You may be able to borrow against your portfolio and meet the need for cash without incurring capital gains and generating more taxes.
What about a mortgage?
Taking out a mortgage on a home or property may seem unwise to wealthy families. Why pay interest on a loan if you can buy the property directly? But in many cases, mortgages offer practical benefits. For example, they can save you from having to liquidate other assets to raise cash for the purchase. The modest interest on a low rate mortgage will often cost far less than the tax impact of selling a highly valued asset. In addition, interest payments on the mortgage may give rise to an income tax deduction. However, you will want to check with your CPA or tax advisor about your particular situation.
More importantly, a mortgage can increase your long-term wealth if the interest rate is low enough. When proceeds from a low-cost loan are used to buy an asset that appreciates at a higher rate than interest, that’s a win. In this case, a mortgage offers an opportunity to build wealth without having to make changes to other parts of your portfolio.
Should I borrow to fund a trust for my children?
As with mortgages, it can seem strange to borrow money to fund trusts for your children or other beneficiaries. But for many families, the other option is to fund the trust with highly valued assets – and thus take on a potentially huge tax burden or pass that tax burden on to future generations. As long as interest rates remain low, there are many situations where interest charges could be significantly lower than tax obligations.
Borrowing can also fund strategies a trust can use to maximize income and estate tax savings, such as buying a growing family business for the benefit of the next generation. Especially for families with complex assets, funding a trust with borrowed money can be both simpler and more cost-effective than funding with long-term cash.
Does auto credit make sense?
It’s a surprisingly common question: when my child needs a car, should I buy it for them or encourage them to wait for the proceeds of their trust? But in many cases, the recommended approach is to help the child get a car loan.
Auto loans can be a very effective introduction to the borrowing and repayment process in a relatively low-stakes environment. They build credit and help the borrower get used to repayment routines. The learning experience is invaluable and probably well worth the usually modest cost of an average car loan.
It is also true that cars are not the ideal way to use trust proceeds. One of the main advantages of a trust is to help manage the tax consequences of transferring family wealth, and this advantage is reduced when you use the proceeds on the depreciation of assets like cars.
Why not keep the loans in the family?
Intra-family loans are one of the great advantages of family patrimony. They’re an easy way to help family members buy a home, start a business, or deal with a financial challenge. Intra-family loans typically carry a lower interest rate than commercial loan rates, making them a less expensive way to enhance wealth-building opportunities for the whole family. They are also a good way to introduce young family members to the responsibilities of a loan.
However, there are rules you must follow if you want to avoid being subject to gift tax. The loan must have a promissory note, repayment schedule, and other required documentation, and the interest rate quoted must be equal to or greater than the applicable federal rate (AFR) published monthly by the IRS .1
Intra-family loans can be a great way to reduce interest costs, while avoiding the usual costs of a bank loan. In addition, they can help you manage the transfer of wealth within your family. Whatever gain the borrower makes from the loan is not subject to gift or inheritance tax.
have the conversation
Although there is no one-size-fits-all approach, a suitable bank loan can be a useful part of your family’s wealth planning. Your age, the types of assets you’ve accumulated, and your beneficiaries all play a role in determining when a bank loan might be a good idea for you and your family. Timing is also important, as these strategies tend to be most useful when interest rates are low and market returns are high.
If you want to know how private banking solutions can help your family achieve their ambitions, contact your CIBC Private Wealth Management advisor or visit Private Bank page.
Private banking is offered by CIBC Bank USA, Member FDIC and Equal Housing Lender. CIBC Bank USA and CIBC Private Wealth Group, LLC are both indirect wholly-owned subsidiaries of CIBC. The CIBC logo is a registered trademark of CIBC, used under licence. The investment products offered are not FDIC insured, may lose value and are not guaranteed by the Bank. Loans subject to credit approval.