Unlocking Liquidity: The Benefits of a Securities-Backed Line of Credit (SBLOC)

High-net-worth individuals and business owners often seek ways to access cash without selling investments and incurring taxes. A powerful solution is a Securities-Backed Line of Credit (SBLOC). This flexible tool allows you to tap into your non-retirement investment portfolio for liquidity while keeping your long-term financial plan on track.

What are SBLOC’s and How Do They Work?

SBLOC is a revolving line of credit secured by the investments in your non retirement brokerage or advisory account, such as stocks, bonds, and mutual funds. It functions similarly to a home equity line of credit, but your investment portfolio acts as collateral instead of your house. You can typically borrow a significant percentage of your portfolio's value, often 50-70%, and make interest-only payments on the amount you borrow. There's no fixed repayment term, allowing you to repay the principal at your convenience and re-borrow as needed within your credit limit.

To qualify, you generally need a sizable investment account, with many providers requiring a minimum portfolio value of $100,000 or more. SBLOC funds are non-purpose, meaning you cannot use them to buy more securities or pay off margin loans on your investment account. However, you can use the money for virtually any other purpose, from unexpected personal expenses to business or real estate investments.

Once approved, your SBLOC provides a revolving credit line. You only pay interest, often at a competitive variable rate, on the amount you borrow. Accessing funds is typically fast, usually available within days. Keep in mind, if your investments fall too much in value due to market declines, you may receive a maintenance call, requiring you to provide more money to the account or pay down the loan; otherwise, the lender can liquidate some of your securities.

Tax Benefits and Strategies:

One of the biggest advantages of SBLOC is the tax benefit of not having to sell appreciated investments. Selling appreciated investments can incur capital gains taxes. By borrowing against your portfolio, you avoid immediate capital gains and defer having to pay those taxes. This allows your investments to potentially continue growing uninterrupted. For example, borrowing $100,000 against a stock worth $200,000 (with a $100,000 gain) means you get the cash tax-free, whereas selling would incur roughly $20,000 in capital gains tax.

This deferral allows you to:

• Wait for Lower Tax Rates or Better Timing: Postpone sales until you anticipate being in a lower tax bracket or when an investment qualifies for long-term capital gains tax.

  
  

• Keep Earning Returns on Pre-Tax Dollars: The money that would have gone to pay taxes remains invested and can continue to grow.

Money borrowed from an SBLOC is not considered taxable income. This is why this "buy, borrow, die" strategy is used by the ultra-wealthy, where they borrow against assets and heirs inherit them with a stepped-up cost basis, potentially avoiding capital gains tax altogether.

SBLOCs facilitate specific tax planning strategies:

• Deferring Capital Gains for Strategic Timing: Borrow against appreciated assets and sell portions gradually over several years to realize gains in smaller increments, potentially at lower tax rates.

  
  

• Avoiding Tax Bracket Creep: Prevent a big one-time spike in income from large asset sales that could push you into higher tax brackets or trigger surtaxes.

  
  

• Paying Tax Bills Without Extra Sales: Use an SBLOC to cover tax payments instead of selling investments and incurring more taxes.

  
  

• Tax-Efficient Gifting or Large Purchases: Borrow via SBLOC to fund large gifts or purchases like a second home, avoiding capital gains and keeping your portfolio intact.

SBLOC vs. Other Credit Options:

• SBLOC vs. HELOC: SBLOCs are generally simpler and faster to set up than HELOCs, which require home appraisals. While HELOC interest can be tax-deductible for home improvements, SBLOC interest is generally not (unless used for certain investments or business purposes).

  
  

• SBLOC vs. Margin Loan: Margin loans are typically for buying more securities , while SBLOCs are non-purpose loans. SBLOCs often have higher loan-to-value limits. Margin interest can be tax-deductible if used to invest in taxable securities.

  
  

• SBLOC vs. Personal Loan: Personal loans are usually unsecured, leading to higher interest rates and lower maximum amounts than SBLOCs. SBLOCs offer more flexibility with interest-only payments and no fixed repayment term.

Risks and Considerations:

• Market Risk to Collateral: A market downturn can reduce your collateral investment value, potentially leading to a maintenance call where the lender can sell your investments.

  
  

• Interest Rate Risk: Most SBLOCs have variable interest rates, meaning the cost of borrowing can increase in a rising rate environment.

  
  

• Discipline and Repayment: While interest-only payments are attractive, the principal still needs to be repaid, so it's wise to have an exit strategy.

  
  

• Restrictions on Use: SBLOCs cannot be used to buy more securities, and lenders can technically demand full repayment at any time.

With prudent use, the benefits of an SBLOC can outweigh the downsides, providing access to cash while keeping your investment portfolio growing.

Is SBLOC Right for You?

Used wisely, a Securities-Backed Line of Credit can be a powerful way to access liquidity, manage taxes, and keep your financial plan on track while your investments continue working for you. Like any strategy, it’s important to understand when it makes sense and how to use it responsibly.

We work with large reputable banks to offer SBLOCs to our clients and help them use this strategy with clarity and confidence. If you're wondering whether an SBLOC is right for you, feel free to reach out as we are happy to talk it through.

This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.