Should you borrow to pay inheritance tax?

If you want to hold inherited assets rather than sell, a securities-backed loan may help

09 Oct 2017

A substantial inheritance means the opportunity for heirs to pay for education, explore philanthropy, finance an entrepreneurial dream or reinvest in the family business.

Before any of that can happen, though, there’s the crucial matter of settling the estate, including taxes.* For 2017, the federal government taxes individual estates valued higher than $5.49 million (the figure is adjusted annually for inflation) at a rate of 40%, according to the IRS. A large tax bill may cause an heir acting as executor to consider selling investments or property that has significant emotional or financial value. One alternative may be to borrow the money to pay the taxes using the estate’s own investments as collateral.

Key takeaways:

  • An estate tax bill can force difficult decisions about whether to sell or maintain assets of personal or financial value.
  • Using eligible investment securities as collateral could enable you to maintain assets in the estate without selling.
  • Borrowing presents risks, including the potential for a margin call or liquidation of pledged assets.
  • Be sure to discuss all of the options with your UBS Financial Advisor and other experts to find the approach best suited for you.

Keeping investments working for you

Trisha Knake, Head of SBL & Accounts Product Management at UBS, recalls one family that faced a multimillion-dollar tax bill on an estate with a large investment portfolio. Selling a portion of those investments to pay the tax bill would have meant disrupting the estate's investment strategy.

Working with a UBS Financial Advisor and a UBS Wealth Management Banker, the family arranged for a securities-backed line of credit using eligible investments as collateral. Although the securities-backed line of credit, like most loans, charged interest monthly, “they realized the portfolio was likely to earn more than the interest they would be charged on the loan,” Knake says. “They saw this as a way to help appreciate their overall wealth, versus liquidating the assets and not investing.” Your UBS Financial Advisor can provide an objective perspective to help you keep your focus on your overall wealth plan, and can alert you to solutions you may not have considered, like securities-backed lending.

Anticipating a tax bill

Securities backed loans may also be useful if you’re planning your own estate—for example, if you want to set aside money to cover anticipated taxes that your heirs might have to pay. Selling investments to raise that money could subject you to sizable capital gains taxes, assuming the investments have grown in value, Knake says. A securities-backed line of credit could help you establish a liquidity option so you can pass along your estate to your heirs intact.

Consider all the risks

Even with their advantages, securities-backed lines of credit may expose you to risks that you should fully consider, says Knake. For example, you would be subject to a margin call if your collateral no longer supports the outstanding loan balance. In this instance, you may be asked to pledge additional assets or pay down a portion of the loan. Or, your assets could be sold to cover the outstanding balance. Another risk associated with market performance could be that the interest on the loan could outpace your portfolio returns.

Consult your team

Before making any decisions regarding your estate, taxes or investments, be sure to speak with a variety of experts, such as a tax attorney, your accountant and your UBS Financial Advisor. With their help, you can explore the various ways to meet your estate tax obligations and help ensure that the inheritance serves its underlying purpose: helping the next generation of loved ones follow their dreams.

Disclosures