Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Credit Lines on Unrealized Gains
Transcript
- Lucas: Imagine you are sitting on fifty million dollars of concentrated stock in a single company. You are not the founder — maybe you are the second-generation family member who inherited it, or an early employee who never sold. You have this massive asset, but you also need cash — for a real estate purchase, a private equity commitment, maybe a divorce settlement. The obvious move is to sell some stock and pay the capital gains tax. But what if there is a way to get the cash without selling, without triggering the tax, without diluting your position? Luna: You are describing a securities-backed line of credit — borrowing against your unrealized gains. It's one of those strategies that sounds too good to be true until you understand the mechanics. Lucas: Exactly. And it is remarkably common among ultra-high-net-worth families. The basic structure is simple: you pledge your publicly traded securities as collateral to a bank or a private lender, and they extend you a line of credit — typically fifty to sixty percent of the value of the pledged assets. You draw down what you need, pay interest only on the drawn amount, and you never have to sell a single share. Luna: So you get liquidity while deferring the capital gains tax indefinitely. That is the core appeal. Lucas: Indefinitely — or at least until you die. Which brings us to the famous 'buy, borrow, die' strategy. Buy the asset, borrow against it to fund your lifestyle, and when you pass away, your heirs get a step-up in basis. That means the capital gains tax liability disappears. The loan is repaid from the estate, or the assets are transferred with the debt attached. Either way, the government never collects the tax on the appreciation. Luna: It is a completely legal tax deferral strategy that, for the ultra-wealthy, can span generations. And the interest rates are actually quite attractive right now. Lucas: Let's talk numbers. As of mid-2026, the SOFR — the Secured Overnight Financing Rate — is hovering around 4.5 percent. For a high-quality securities-backed line of credit, you are typically paying SOFR plus a spread of somewhere between 75 and 150 basis points. So all-in, you are looking at 5.25 to 6 percent. Compare that to the long-term average annual return of the S&P 500, which is around 10 percent. If you believe your concentrated stock will appreciate at something close to that, borrowing at 5.5 percent to hold the stock is a positive carry trade. Luna: And you are also avoiding the immediate tax hit. If you sold that fifty million dollars in stock with a cost basis of ten million, you would owe long-term capital gains tax on forty million. At the top federal rate of 23.8 percent — twenty percent plus the net investment income tax — that is nearly 9.5 million dollars in taxes. Gone. Lucas: That is the tax alpha. By not selling, you keep that 9.5 million working for you. And the loan interest itself is sometimes deductible if the proceeds are used for investment purposes — that is a whole other layer. But the key point is: this is not margin lending in the traditional brokerage sense. It is a bespoke credit facility, often structured through a family office or a private bank. Luna: What is the difference? I always thought pledging securities was just margin. Lucas: The difference is in the terms. A standard margin loan from a brokerage is typically callable at any time, tied to strict maintenance requirements, and the brokerage can liquidate your positions without notice if the stock drops. A securities-backed line of credit from a private bank or a specialized lender is often more flexible. The loan agreement might have a fixed term — three years, five years — with an interest-only period. The collateral is monitored, but the lender is less trigger-happy. They work with you if the stock dips, as long as you can post additional collateral or pay down part of the loan. Luna: So it is essentially a custom loan product for wealthy clients, not a one-size-fits-all margin account. Lucas: Right. And the pricing reflects that. The spread over SOFR is lower than what you would get on an unsecured loan, but higher than a typical margin rate at a large brokerage. But what you are paying for is the relationship and the stability. Luna: What about the risks? I imagine the biggest one is a margin call — if the stock drops, the lender demands more collateral or repayment. Lucas: That is the nightmare scenario. Say you pledge fifty million in stock, borrow twenty-five million. The loan to value ratio is 50 percent. If the stock drops 40 percent, your collateral is now worth thirty million. The lender's maximum LTV might be 60 percent, so they would allow a loan of up to eighteen million. You have twenty-five million drawn — you are seven million over the limit. You get a call: post more collateral, pay down the loan, or they liquidate. Luna: And if the stock is your only major asset, you could be forced to sell into a falling market — the exact scenario you were trying to avoid. Lucas: Exactly. That is why advisors recommend not borrowing more than 30 to 40 percent of the collateral value, even if the bank offers 60. You want a cushion. And ideally, you have other assets you can pledge if needed. Luna: What about the regulatory landscape? I recall the Federal Reserve has been looking at non-purpose loans — loans where the proceeds are not used to buy securities — more closely. Lucas: That is a hot topic in 2026. Under Regulation U, if a loan is secured by stock and the proceeds are used to buy more stock, it is a purpose loan and subject to margin requirements. But if the proceeds are used for anything else — a house, a business, a boat — it is a non-purpose loan, and those have traditionally been less regulated. However, the Fed has been signaling that it wants more transparency. There is concern that these loans create hidden leverage in the financial system. If a lot of wealthy families are borrowing heavily against their stock, and the market corrects, the forced selling could amplify the downturn. Luna: So there is systemic risk. And the regulators are starting to pay attention. Lucas: Yes. In early 2026, the Fed issued a proposal that would require banks to report more data on their securities-backed lending portfolios. The comment period just closed in April. The industry is pushing back, arguing that these loans are well-collateralized and not a source of systemic risk. But the regulatory trend is toward more oversight, not less. Luna: What about estate planning? How does this fit with the step-up in basis? Lucas: That is where the magic happens. Let's go back to our fifty million dollar family. They borrow twenty million against the stock. They use that money to buy a vacation home, pay for education, whatever. Over time, the stock appreciates to seventy million. They die. The heirs inherit the stock with a step-up in basis to the date of death value — seventy million. The loan of twenty million is still outstanding, but the estate pays it off or the heirs assume it. Either way, the capital gains tax on the fifty million dollar gain from the original basis is gone. The heirs can sell the stock immediately with no tax, or they can start the strategy all over again. Luna: So effectively, the family used the loan to consume the appreciation tax-free. The government gets nothing. Lucas: Well, not nothing — there might be estate tax. But for estates below the federal exemption — which is around thirteen million per person in 2026 — there is no federal estate tax. And many states have their own exemptions. So a well-structured plan can indeed result in the capital gains tax being permanently avoided. Luna: Is there any scenario where this backfires on the tax side? For example, if the loan is forgiven? Lucas: Loan forgiveness is taxable income, generally. But in this context, the loan is never forgiven — it is repaid from the estate. The real risk is if the interest rate rises significantly, making the carry trade negative. If SOFR goes to 8 percent and your loan costs 9 percent, you are bleeding cash. Or if the stock underperforms. Then you are paying interest on a depreciating asset. That is a recipe for disaster. Luna: So it is a strategy for bull markets, or at least for stable, appreciating assets. It is not a one-size-fits-all. Lucas: Exactly. It works best for concentrated positions in high-quality stocks with low volatility and strong long-term prospects. Think Berkshire Hathaway, Microsoft, Apple. Companies that are unlikely to drop 50 percent overnight. For a volatile stock — a biotech or a crypto-related holding — the risk of a margin call is much higher. Luna: What about the cost of setting up one of these lines? Is there a minimum asset level? Lucas: Most private banks want at least five to ten million in liquid assets to even consider a securities-backed line. For smaller amounts, you are looking at standard margin. The setup costs are minimal — legal fees for the documentation, maybe a few thousand dollars. The real cost is the time and relationship management. You need a banker who understands the strategy and is willing to structure the loan properly. Luna: And that is where a family office comes in. They can negotiate better terms, monitor the loan to value ratios, and coordinate with the estate planning team. Lucas: Exactly. For a family with a single-family office, this is a core tool. For families without one, a good wealth manager at a firm like Goldman Sachs or JPMorgan Private Bank can handle it. Luna: I want to step back and ask a broader question: is this strategy really just for the ultra-wealthy, or could a moderately affluent person use it? Lucas: The concept scales down. If you have a million dollars in a diversified portfolio, you can get a margin loan from Schwab or Fidelity at SOFR plus a spread. But the 'buy, borrow, die' tax benefits are much smaller because the step-up in basis is less valuable. The strategy truly shines when the unrealized gain is large — tens of millions. That is why it is a hallmark of ultra-high-net-worth planning. Luna: It is one of those strategies that, when you hear about it, you wonder why everyone doesn't do it. But the risks and complexity are real. Lucas: Absolutely. And that is the theme of this whole podcast series: these tools are powerful, but they require discipline and professional guidance. Luna: Speaking of which, a quick honest thing. This podcast is ad-free and listener-supported. A handful of our listeners chip in monthly at buy me a coffee dot com slash fexingo, and that literally funds making this many episodes. If our money conversations have helped you think about a decision differently, that is the way to keep it going. Lucas: Yeah, and we really mean that. No pressure ever. But if you value the deep dives, that's the only engine behind them. So — back to the credit line strategy. One more nuance I think is worth highlighting: the interest rate environment matters enormously for the timing of when you set up the line. Luna: You mean locking in a fixed rate versus floating? Lucas: Exactly. Many of these lines are floating rate — tied to SOFR. So if you borrow in a low-rate environment, you are golden. But if you borrow when rates are high, the cost can be punitive. Some lenders offer a fixed-rate option for a term, but the spread is higher. The decision depends on your outlook for rates and how long you plan to carry the loan. Luna: And with the Fed signaling potential rate cuts later in 2026, floating might be the better bet right now. Lucas: That is the conventional wisdom. But if you need certainty, you might pay up for fixed. It's a classic risk management trade-off. Luna: Alright, I think we have covered the essentials. Securities-backed lending: a tool for tax-efficient liquidity, but not without risks. Thanks, Lucas. Lucas: Thanks, Luna. And thanks to our listeners. Until next time.