By Matthew R. Brandon

Making-the-Right-Call--Using-Credit-Strategically-feature

The New England Patriots won their fifth Super Bowl Championship in 15 years on Feb. 5, 2017, under the leadership of Coach Bill Belichick. No doubt this was an amazing feat, but what really made headlines the following day was how they actually pulled off the win. With less than four minutes remaining, the Atlanta Falcons were up 28-20, inside the 25-yard line, and many of us thought the game was out of reach. But, instead of running the ball and forcing New England to use their timeouts, the Falcons were knocked out of field goal range and New England was able to tie at 28. After making a series of poor play calls that ultimately cost the Falcons the championship, New England won in overtime.

In the game of football, it’s critical to make the right strategic calls the fourth quarter. However, in our personal lives, it’s often what we do earlier that sets the tone for the year. The New Year is the time we celebrate and reflect on our prior year’s achievements and surmounted challenges, and think about how to capitalize on the opportunities ahead of us. One way many affluent individuals achieve success is through the strategic use of credit to help manage their taxes and cash-flow needs.

Understanding Leverage

Growing up in the early 80s, I learned to avoid debt at all costs. I was taught that debt was analogous to handcuffs, restraining one from financial freedom and success. In college, while taking accounting courses, I began to grasp the power of leverage and realized that, when properly structured, debt can accelerate wealth accumulation as well as protect it.

According to the most recent Federal Reserve Survey of Consumer Finances, approximately 74.5 percent of households carry some level of debt. Interestingly, that percentage only drops to 71 percent when isolated to those households considered to be top 10th percentile of wealth. While many use debt out of necessity, the affluent borrower approaches debt from an opportunistic standpoint.

Having recently wrapped up tax season, it’s a good time to reflect on two of my recent interactions, both involving clients who needed funds to pay tax obligations. In both situations, the clients were carrying large unrealized gains in their portfolios.

Take Time to Assess Your Situation

The first interaction involved a client who needed to raise about $250,000. He decided the easiest way was to sell securities and raise the funds. He chose to sell a position purchased several years ago. So, without consulting his CPA or financial advisor, the client executed the trades and raised the cash. This particular client happens to be in the highest marginal tax bracket of 39.6 percent and pays long-term capital gains at a rate of 20 percent. With income exceeding $200,000 ($250,000 married filing jointly), he is also subject to the net investment income tax (3.8 percent). This client resides in North Carolina where long-term gains are taxed like ordinary income, so he will pay 5.75 percent to the state. In this situation, the client will pay approximately $21,500 or around 29 percent of the $73,000 gain that was realized, excluding the $2,800 in lost dividend income. Knowing the client is planning to retire in 2018, he could have reduced his tax liability by leveraging his portfolio with a securities secured line of credit. In 2018, his anticipated marginal tax rate is 25 percent, meaning he will not have to pay long-term capital gains tax.

Debt Play Can Help You Score

The second client had a similar situation, but prior to selling assets she reached out to her advisor. The client had recently completed a financial plan, and the advisor recalled her plans to downsize. He recommended she establish a securities secured line of credit and leverage that temporarily to cover the tax obligation. She used proceeds from the sale of her existing home to pay off the debt. The client qualified for the IRS personal residence exclusion, allowing individuals to exclude up to $250,000 of gain ($500,000 if married filing jointly), which allowed her to repay the loan balance without incurring capital gains taxes. This saved her approximately $17,000.

Remember that debt can be a valuable play in your financial playbook. Keep that in mind and use your BB&T financial team to help you make the right call.

By Matthew R. Brandon

Making-the-Right-Call--Using-Credit-Strategically-feature

The New England Patriots won their fifth Super Bowl Championship in 15 years on Feb. 5, 2017, under the leadership of Coach Bill Belichick. No doubt this was an amazing feat, but what really made headlines the following day was how they actually pulled off the win. With less than four minutes remaining, the Atlanta Falcons were up 28-20, inside the 25-yard line, and many of us thought the game was out of reach. But, instead of running the ball and forcing New England to use their timeouts, the Falcons were knocked out of field goal range and New England was able to tie at 28. After making a series of poor play calls that ultimately cost the Falcons the championship, New England won in overtime.

In the game of football, it’s critical to make the right strategic calls the fourth quarter. However, in our personal lives, it’s often what we do earlier that sets the tone for the year. The New Year is the time we celebrate and reflect on our prior year’s achievements and surmounted challenges, and think about how to capitalize on the opportunities ahead of us. One way many affluent individuals achieve success is through the strategic use of credit to help manage their taxes and cash-flow needs.

Understanding Leverage

Growing up in the early 80s, I learned to avoid debt at all costs. I was taught that debt was analogous to handcuffs, restraining one from financial freedom and success. In college, while taking accounting courses, I began to grasp the power of leverage and realized that, when properly structured, debt can accelerate wealth accumulation as well as protect it.

According to the most recent Federal Reserve Survey of Consumer Finances, approximately 74.5 percent of households carry some level of debt. Interestingly, that percentage only drops to 71 percent when isolated to those households considered to be top 10th percentile of wealth. While many use debt out of necessity, the affluent borrower approaches debt from an opportunistic standpoint.

Having recently wrapped up tax season, it’s a good time to reflect on two of my recent interactions, both involving clients who needed funds to pay tax obligations. In both situations, the clients were carrying large unrealized gains in their portfolios.

Take Time to Assess Your Situation

The first interaction involved a client who needed to raise about $250,000. He decided the easiest way was to sell securities and raise the funds. He chose to sell a position purchased several years ago. So, without consulting his CPA or financial advisor, the client executed the trades and raised the cash. This particular client happens to be in the highest marginal tax bracket of 39.6 percent and pays long-term capital gains at a rate of 20 percent. With income exceeding $200,000 ($250,000 married filing jointly), he is also subject to the net investment income tax (3.8 percent). This client resides in North Carolina where long-term gains are taxed like ordinary income, so he will pay 5.75 percent to the state. In this situation, the client will pay approximately $21,500 or around 29 percent of the $73,000 gain that was realized, excluding the $2,800 in lost dividend income. Knowing the client is planning to retire in 2018, he could have reduced his tax liability by leveraging his portfolio with a securities secured line of credit. In 2018, his anticipated marginal tax rate is 25 percent, meaning he will not have to pay long-term capital gains tax.

Debt Play Can Help You Score

The second client had a similar situation, but prior to selling assets she reached out to her advisor. The client had recently completed a financial plan, and the advisor recalled her plans to downsize. He recommended she establish a securities secured line of credit and leverage that temporarily to cover the tax obligation. She used proceeds from the sale of her existing home to pay off the debt. The client qualified for the IRS personal residence exclusion, allowing individuals to exclude up to $250,000 of gain ($500,000 if married filing jointly), which allowed her to repay the loan balance without incurring capital gains taxes. This saved her approximately $17,000.

Remember that debt can be a valuable play in your financial playbook. Keep that in mind and use your BB&T financial team to help you make the right call.

About the Author

Matthew R. Brandon

Matthew R. Brandon

Senior Vice President, Wealth Lending Team Director

Matt joined BB&T in 2001 and the Wealth division in 2008 as a Wealth Lending officer. Prior to joining Wealth, Matt served as a commercial banking team leader. He currently serves as a Wealth Lending team director dedicated to the BB&T Scott & Stringfellow private client group. Matt received his bachelor’s degree in finance from Virginia Tech and earned his CFP® designation in 2010.