Exploring options for tax payments
A closer look at ways to generate liquidity while keeping your portfolio intact this tax season
Whether you pay business and personal taxes, need to maximize prior-year retirement account contributions or have property taxes coming due, you may need a liquidity solution that doesn’t disrupt your long-term financial goals.
If you need funds to pay your taxes but you don't want to tap into your savings, you may have other options. Selling securities can provide cash within a few days, but it may disrupt your investment strategy and create a new tax liability for the current year. Paying taxes with a credit card may come with high interest rates and potential fees. A short-term bank loan may take more time than you have before your taxes are due. There is a range of options to consider, and a borrowing solution could be useful in helping you make tax payments. Below are a few credit solutions that you can discuss with your advisor to evaluate which option fits best into your financial strategy.
A Loan Management Account® (LMA® account)1, a Home Equity Line of Credit (HELOC)2 and a Customized Lending solution are three convenient alternatives available from Bank of America® that may allow you to leverage existing assets as collateral for a flexible line of credit so you can maintain your current wealth management strategy.
Loan Management Account® (LMA® account)
If you have a significant portfolio of eligible investments, this option allows you to borrow against the value of your pledged securities. An LMA account can:
- Give you on-demand access to the cash you need for taxes or other large purchases without having to sell your investments.
- Help you avoid the tax consequences of selling appreciated investments.
- Offer competitive interest rates with no application fee or annual fees.
How does an LMA Account work?
When you open an LMA account, your total available credit will be based primarily on the combined value of all your eligible assets used as collateral. Your financial advisor can help you open the account.
- You can easily access funds, generally within one day of approval.
- Choose from both variable-rate and fixed-rate loans1 and manage multiple loans through a single account.
- An LMA has no annual fee and no minimum balance required after your credit line is established, so you can access funds at any time.
- You can continue to manage your brokerage accounts even though you've used them as collateral, subject to certain restrictions.
- Note that securities-based financing involves special risks and is not for everyone. Be sure you consider these risks before borrowing (see risks below).
Home Equity Line of Credit (HELOC)
If you have available equity in a home you own, this option allows you to borrow against that available home equity without disrupting your financial strategies. A HELOC can:
- Provide you with convenient on-demand access to the cash you need, up to your available credit limit.
- Help you avoid selling assets or depleting your cash reverse to pay for large purchases or expenses.
- Offer generally lower rates than credit cards or personal loans, with no application fees, closing costs (on lines of credit up to $1,000,000) or annual fees.
How does a HELOC work?
When you open a HELOC, your total available credit will be based on a percentage of your home’s value, less any amount you still owe on the home.
- Your advisor will introduce you to a Bank of America Wealth Management Lending Officer who will help you every step of the way.
- HELOCs come with a 30-year term: an initial 10-year draw period followed by a 20-year amortized repayment period. You have the flexibility to decide when and how much to use (up to your available credit limit) through Bank of America’s Online Banking, by phone, at Bank of America financial centers or with no-access-fee checks.
- During the draw period, your available credit is replenished as you repay the outstanding balance, so you can borrow against it again as you need to.
- You can convert some or all of the variable-rate balance to a fixed-rate loan option.2
- Interest you pay may be tax deductible. Please consult your tax advisor regarding interest deductibility.
- Specialist interest rate discounts are available.3
If you have specialized assets, this option allows you to use a range of liquid and illiquid assets as collateral to obtain additional liquidity. Custom Lending can:
- Provide a customized approach to meet your complex financial needs.
- Grow your invested assets, possibly at a rate that outpaces the interest on a loan.
- Help you retain cash reserves and potentially keep your investment strategy intact.
- Avoid the sale of investments in down markets or potentially creating a taxable event on the sale of those assets.
How does Custom Lending work?
If you need a tailored lending solution, a credit executive will discuss areas that could be strengthened with additional liquidity, unlock potential ventures and consider hedging strategies to protect your assets against rising interest rates or market swings.
- Specialized assets include, but are not limited to, marketable securities, real estate, yachts, aircrafts, fine art and hedge fund positions.
- You can maintain a disciplined approach to managing your wealth while still giving you access to cash when you need it.
- A credit executive and your advisor work together to offer attractive loan structures, competitive rates and flexible terms, customized to meet your needs.
- Credit executives are empowered to make decisions at the local level, which results in highly responsive underwriting.
- Credit facilities are tailored to your time frame, cash flow needs and collateral types.
- Note that asset or securities-based financing involves special risks and is not for everyone.
Borrowing does have inherent costs and certain risks as well as benefits. It is important to factor in borrowing costs and well as potential market volatility, the possibility of collateral calls and other covenants and restrictions on collateral in making a decision to use leverage. Also, if on-lending funds to other family members, it is important to seek independent advice on tax and other issues, as well as establishing clear protocols on interest and repayment.
Securities-based financing involves special risks. Clients should review their LMA Loan Agreement and related documents and disclosures carefully and consult with their own independent tax and legal advisors.
Some risks to consider include:
- A decline in the value of collateral assets may require the client to provide additional funds or securities to avoid a collateral maintenance call. Clients can lose more funds than are held in the collateral account. The LMA account is a full recourse loan and the account holder will be liable for any deficiency.
- The Bank can force the sale or other liquidation of any securities or other investment property in the collateral account and, unless otherwise required by law, can do so without first contacting the account holder.
- The account holder is not entitled to choose which securities in the collateral account are liquidated or sold.
- The Bank can change its collateral maintenance requirement at any time without notice to clients.
- Clients are not entitled to an extension of time to satisfy the Bank’s collateral maintenance requirement.
- There may be adverse tax or other consequences to clients if securities are sold or otherwise liquidated by the Bank.
- The LMA account is an uncommitted facility, although loans to individuals and trusts may be committed in an amount not to exceed $100,000. The Bank may demand full or partial repayment at any time, and any commitment may be immediately terminated.
- For fixed-rate advances and term loans, principal payments made in advance of the end of the applicable fixed-rate period, whether voluntarily or involuntarily (due to demand or liquidation by the Bank), may be subject to a substantial breakage fee as determined by the Bank.
- Some restrictions on the use of LMA account proceeds may apply under the terms of loan documents and applicable laws and regulations. The LMA account cannot be used to purchase marketable securities unless specifically agreed by the Bank.
- Interest rate risk – As a variable-rate loan, interest rates and payments can change. Clients should carefully consider these risks before borrowing.
- Potential repayment volatility — For clients who opt for an initial interest-only period, at the end of this period, they will still owe the original amount borrowed, and the monthly payment will increase significantly and may result in “payment shock” — even if interest rates stay the same. If clients want to make interest-only payments, the advisor should discuss what the payments will be after the end of the interest-only period.
- HELOC funds may not be used to purchase, carry or trade securities or repay debt incurred to purchase, carry or trade securities.
Custom lending may involve special risks and may not be appropriate for all clients. In particular, custom lending may be subject to additional credit and legal approval because of special risks and restrictions that need to be carefully considered. Real estate financing and specific program options and property types may not be available in all states and may be subject to change from time to time. As a general rule with respect to each client, consideration must be given to capital gains tax implications, portfolio makeup and risk tolerance, portfolio performance expectations, and investment time horizon.
Your Merrill advisor can help you consider your available options, open an account if appropriate and choose the best loan structure for your needs. Consult your legal or tax advisor for additional guidance on tax implications of current liquidity options and planning for future tax liabilities.4