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How Can Private Banking Complement Your Family’s Wealth Plan?

Banking decisions aren’t always front and center in wealth planning, but they should be part of the conversation.

Family wealth plans are typically focused on long-term investments or complex tax strategies. Banking solutions don’t often get a lot of attention, but it is important when viewing both sides of the balance sheet and how lending and deposits can preserve and expand wealth. Day-to-day cash management is woven into our daily activities, and utilizing leverage and the appropriate credit and interest rate structures can provide options to individuals and families when transitioning wealth from one generation to the next.

When does it make sense to use private banking services for these solutions? Here are some situations where families can use banking techniques to address immediate needs while benefiting their long-term wealth planning.

Should I borrow from a bank to pursue growth?

Building wealth often means borrowing funds up front to fund a potentially significant opportunity. For most families, that means a bank loan, and the risks (and costs) associated with it. Debt can be impactful in the right situations, but as anyone who experienced the 2008/2009 financial crisis can tell you, debt can have its downfalls.

How do you balance the potential gains against the risks? The cost of the interest is what matters most. When rates are low, debt can help you acquire assets that you may need now. It can also help bridge the gap between anticipated liquidity events. For example, perhaps you need liquidity to pay income taxes, but you don’t want to disturb your investment strategy. You may be able to borrow against your portfolio and fulfill the liquidity need without incurring capital gains and generating more taxes.

What about a mortgage?

Taking out a mortgage on a house or property can seem unwise to families with wealth. Why pay interest on a loan if you can buy the property outright? But in many cases, mortgages offer practical advantages. For instance, they can spare you from having to liquidate other assets to gather cash for the purchase. The modest interest on a low-rate mortgage loan will often cost much less than the tax hit from selling a highly appreciated asset. Also, the payments of interest on the mortgage may produce an income tax deduction. However, you will want to check with your CPA or tax advisor regarding your specific situation.

More importantly, a mortgage can enhance your long-term wealth if the interest rate is low enough. When low-cost loan proceeds are used to purchase an asset that appreciates at a higher rate than the interest, that’s a win. In that case, a mortgage provides a wealth-building opportunity without having to make changes in other parts of your portfolio.

Should I borrow to fund a trust for my children?

As with mortgages, it may seem odd to borrow money to fund trusts for your children or other beneficiaries. But for a lot of families, the other option is to fund the trust with highly appreciated assets— and thereby take on a potentially huge tax burden or shift that tax burden to future generations. As long as interest rates remain low, there are many situations where interest costs could be significantly less than tax obligations.

Borrowing can also fund strategies that a trust can use to maximize income and estate tax savings, such as purchasing a growing family business for the benefit of the next generation. Especially for families with complex assets, funding a trust with borrowed cash can be both simpler and more cost-effective than funding with cash in the long run.

Do car loans 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 a lot of cases, the recommended move is to help the child secure a car loan.

Car loans can serve as a very effective introduction to the process of borrowing and repayment in a relatively low stakes environment. They build credit and help the borrower get used to repayment routines. The learning experience is invaluable and likely well worth the typically modest cost of the average auto loan.

It’s also the case that cars are not the ideal way to use trust proceeds. One key benefit of a trust is to help manage the tax consequences of family wealth transfer, and that benefit is undercut when you use the proceeds on depreciating assets like cars.

Why not keep the loans in the family?

Intrafamily loans are one of the great benefits of family wealth. They are a ready way to help family members buy a home, start a business, or manage a financial challenge. Intrafamily loans typically carry an interest rate that is lower than commercial lending rates, which makes them a cheaper way to enhance wealth-building opportunities for the whole family. They are also a good way to introduce younger family members to the responsibilities of a loan.

However, there are rules you need to follow if you want to avoid becoming subject to gift tax. The loan should have a promissory note, repayment schedule and other required documentation, and the stated interest rate must be at or above the applicable federal rate (AFR) published by the IRS monthly.1

Intrafamily loans can be a great way to lower interest costs, while also sidestepping the usual costs of a bank loan. In addition, they can help you manage wealth transfer within your family. Whatever gain the borrower achieves from the loan is not subject to gift or estate tax.

Have the conversation

While there is no “one-size-fits-all’ approach, appropriate bank borrowing 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 bank borrowing might make sense for you and your family. Timing is also important, too, as these strategies tend to be most valuable where interest rates are low and market returns high. 

If you’re interested in learning how private banking solutions can help your family achieve their ambitions, contact your CIBC Private Wealth advisor or visit CIBC’s Private Banking 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 license. Investment Products Offered are Not FDIC-Insured, May Lose Value and are Not Bank Guaranteed. Loans subject to credit approval.

IrsApplicable Federal Rates | Internal Revenue Service

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