Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Wealthy Families Use Structured Credit Lines
Transcript
- Lucas: I was talking to a family office lawyer last week — he mentioned that one of his clients just took out a $5 million line of credit against a stock portfolio to buy a vacation property. No sale. No capital gains. Just borrowed at roughly 2 percent above SOFR. Luna: That's the classic 'buy, borrow, die' strategy in action, right? Use the assets as collateral, avoid the tax trigger, and eventually pass them on with a step-up in basis. Lucas: Exactly. And it's not just for vacation homes. Structured credit lines — securities-based lending — are becoming a core tool for ultra-wealthy families who want liquidity without disturbing their investment portfolios. In this rate environment — mid-2026, SOFR around 4.5 percent — the all-in cost is roughly 6 to 6.5 percent. That's still cheaper than selling a concentrated position and paying 20 to 23.8 percent in capital gains tax. Luna: And if you can get a listener-supported podcast going for a few dollars a month, that's even cheaper. Speaking of which — a couple of dollars a month is genuinely what keeps these shows ad-free. If our money conversations have helped you think about a decision differently, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small thing that makes a big difference. So back to the credit line structure — banks like JPMorgan, Goldman Sachs, and UBS offer these as 'purpose loans' for specific purchases like real estate, or 'non-purpose loans' where the borrower can use funds for anything except buying securities on margin. Luna: What's the typical minimum? I assume this isn't for the average retail investor. Lucas: Most private banks start at $1 million, but the real action is at $5 million and up. And the terms are remarkably flexible — you can draw down as needed, pay interest only, and the loan doesn't amortize. Some families even use these lines to fund business acquisitions or to bridge liquidity between large asset sales. Luna: So they're essentially using their appreciated stocks as a checking account. But what happens if the market drops? That's the risk, right? Lucas: That's the key question. Banks typically lend 50 to 70 percent of the portfolio's value — so for a $20 million stock portfolio, you might get a $12 million line at most. If the portfolio drops, the bank can issue a margin call, asking you to either add collateral or pay down the loan. In 2020, during the COVID crash, a lot of wealthy families got caught off guard. Some had to sell at the worst time or pledge additional assets. Luna: And if the portfolio is concentrated in a single stock — like a founder with millions in company shares — the haircut is even bigger. Banks might only lend 25 to 30 percent against a single name. Lucas: Right. Diversified portfolios get better terms. And some families are now using hedging strategies — collars or protective puts — to reduce the risk of a margin call. If you're paying 6 percent interest, adding a hedge might cost 1 to 2 percent, but it protects you from a forced liquidation. Luna: Is the interest tax-deductible? That's a big factor. Lucas: It depends. If the loan is used for investment purposes — buying a rental property, funding a business — the interest is generally deductible against investment income. But if you use it for personal expenses like a vacation home or a yacht, the IRS treats it as personal interest, which is not deductible. So the 'purpose' matters. Luna: So a family might structure the loan to fund a real estate investment, deduct the interest, and then use the rental income to pay the loan. That's efficient. Lucas: Exactly. And there's another layer: some families are using these lines to fund life insurance premiums — specifically private placement life insurance, which we covered in episode 52. The loan gives them liquidity, and the insurance policy provides a tax-free death benefit. It's a way to 'buy, borrow, die' with a tax advantage. Luna: What about estate planning? I've heard of families using credit lines to avoid selling assets before death, so the heirs get a step-up in basis. Lucas: That's a huge driver. If you have a $50 million stock portfolio with a cost basis of $10 million, selling would trigger a $40 million capital gain — roughly $8 to $9 million in tax. Instead, you borrow for living expenses, hold until death, and your heirs inherit the stock at the stepped-up basis of $50 million. The loan gets paid off from the estate, but the tax liability disappears. Luna: So the government essentially subsidizes wealthy borrowing. That's the criticism, right? That this strategy is a way to avoid taxes that middle-class families can't use. Lucas: It's a valid point. The step-up in basis is a long-standing tax provision, and securities-based lending is a legal way to access it. But not everyone can do it — you need a large, liquid portfolio. For most people, the cost of borrowing at 6 percent against their 401 isn't an option. The ultra-wealthy have more flexibility. Luna: Are there any regulatory changes on the horizon? I know the Biden administration proposed limits on step-up in basis, but that hasn't passed. Lucas: As of June 2026, step-up is still intact. But there's talk of capping it at $5 million or $10 million per couple. If that happens, the 'borrow till death' strategy becomes less valuable for the largest estates. But for now, it's still a powerful tool. Luna: Let's talk about the mechanics. How does a family actually set up one of these lines? Is it like a mortgage? Lucas: Not really. You open a brokerage account at a bank or wealth manager, transfer the securities, and sign a loan agreement. The bank places a lien on the assets. You get a line of credit — often a checkbook or a debit card. You draw funds when you need them, and interest accrues daily. There's no fixed repayment schedule, but the loan is typically callable at the bank's discretion. Luna: Callable — meaning they can demand full repayment at any time? Lucas: Technically yes. In practice, banks rarely call a performing loan unless the collateral drops sharply. But during the 2008 financial crisis, some banks did call lines, forcing borrowers to sell at distressed prices. That's why the hedging I mentioned earlier is so important. Luna: What about the rate structure? You said SOFR plus 2 percent. Is that typical? Lucas: For a large portfolio, yes. SOFR is the secured overnight financing rate — it's the benchmark for these loans, replacing LIBOR. As of mid-2026, SOFR is around 4.5 percent, so the all-in rate is 6 to 6.5 percent for the best clients. Smaller loans or riskier collateral might get SOFR plus 3 or 4 percent. Some banks offer fixed-rate options for a premium. Luna: And how does that compare to a traditional mortgage? A 30-year fixed mortgage is around 7 percent right now, so the securities-based line is actually cheaper. Lucas: It is, plus it's more flexible. No amortization, no closing costs, no appraisal. You can access funds in days. For a family that needs $2 million quickly for a business opportunity, this is much faster than selling assets or getting a mortgage. Luna: But what about the opportunity cost? If you're using stocks as collateral, you can't sell them without paying off the loan. So you're locking up your assets. Lucas: That's true — the assets are essentially pledged. But most families don't plan to sell those stocks anyway. They're long-term holdings, often with low cost basis. So the line gives them liquidity without triggering a tax event. Luna: I've also seen families use these lines to fund charitable donations — they donate appreciated stock directly to a donor-advised fund, then use a credit line for cash needs. That way they get the charitable deduction and avoid realizing gains. Lucas: That's a sophisticated combination. Episode 51 covered donor-advised funds, and this is a natural extension. The credit line provides cash flow, while the stock donation reduces taxable income. It's a double win. Luna: What about international families? Can they use this strategy with US assets? Lucas: Yes, but it's more complex. non us residents often face withholding taxes on dividends, and banks may require a us based trustee. Some families set up a US LLC to hold the securities, then borrow through that entity. It's doable, but you need good cross-border tax advice. Luna: So the key takeaway: securities-based lending is a flexible, tax-efficient way for wealthy families to access cash without selling assets, but it comes with margin-call risk and requires careful planning. Lucas: Exactly. And it's not just for the ultra-wealthy. Any investor with a substantial portfolio — say $500,000 or more — can explore this at a discount brokerage. But the real value is when you combine it with other strategies: step-up in basis, donor-advised funds, private placement life insurance. It's a toolkit. Luna: One last question: what's the one mistake families make with these lines? Lucas: Over-borrowing. They take the maximum line, then the market drops 20 percent, and suddenly they're in margin call territory. A good rule of thumb is to borrow no more than 30 percent of your portfolio's value, even if the bank offers 50. Leave room for volatility. Luna: Sound advice. And if anyone wants to support the show — buy me a coffee dot com slash fexingo. Every bit helps us keep going. Lucas: Absolutely. Next episode, we'll look at how wealthy families are using private equity secondaries for liquidity — another way to get cash without triggering taxes. See you then.