Using Credit Strategies Wisely in Retirement Planning.

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1 Using Credit Strategies Wisely in Retirement Planning. Prepared by. Lawrence Katz, Regional Private Banking Manager. Todd Barfield, Regional Private Banking Manager. In this white paper. 1 Meeting capital needs, 2 Maximizing tax efficiencies, 3 Supporting your children, 4 Preserving your legacy, 5 Considerations when integrating credit in retirement planning.

2 Using Credit Strategies Wisely in Retirement Planning. As high net worth baby boomers transition to retirement, can borrowing strategies still be a useful tool in meeting their financial goals? During your peak earning years, credit may provide an effective and efficient wealth accumulation tool when integrated judiciously as part of a financial plan. However, as retirement nears, people may become less willing to borrow. Common wisdom might suggest that if you are changing your focus from wealth accumulation to wealth preservation, you may want to consider eliminating liabilities to potentially help maximize your retirement income. Accumulated liquidity might appear to be a more prudent solution to fund major purchases or life events during retirement. However, there are exceptions to that broad rule, with many examples of valuable uses of credit at this stage of life. In fact, as you near retirement, credit may remain a very useful tool when used as part of a wealth plan reflective of your personal situation. In this paper, we will look at four common examples of how borrowing strategies may still be used wisely to help high net worth individuals more confidently meet their retirement goals. 1 Meeting capital needs. As capital needs arise buying a vacation home, for example using a line of credit secured by your investments may be a useful borrowing strategy. You may have liquid assets to tap into from an investment portfolio, but there may be tax implications related to the sale of securities. If you use a line of credit secured by your investments, this potential solution may help fund your purchase while also helping you avoid triggering potential capital gains taxes that might result from the sale of your securities. In this scenario, you may be able to access the money that you need without disrupting your investment portfolio or cash flow, staying on track to meet your retirement financial goals. As long as your account has sufficient eligible securities to use as collateral, this type of credit line may be easier to obtain and may possibly be more cost effective than other alternatives. Given the likelihood of higher interest rates in the future, the interest rate that you pay on a loan or line of credit will be a critical consideration when calculating whether to liquidate your investments or borrow against those investments to fund your vacation home purchase. It s also important to note that pledging securities as collateral for a loan or line of credit carries risks that may not be suitable for everyone. Review the suitability of pledging securities as collateral with your financial professional as well as discuss with your tax advisor regarding compliance with IRS regulations. By working closely with your wealth relationship team and tax advisors, you can determine the potential impacts from financial decisions on your investment strategy and cash flow planning. If you can establish that your return on the investment is likely to be higher than the cost of the loan or line of credit, then such a strategy may make sense. 2 Maximizing tax efficiencies. After years of investing in the stock and bond markets, you may have unrealized capital gains in your investment accounts. If you decide to sell some of your securities and withdraw cash from those accounts to make a purchase, any gains will be realized and you may be subject to long-term capital gains taxes up to 20 percent, depending on your ordinary income tax rate. It s important to consider inherent tax benefits associated with some lending strategies. For example, mortgage interest expense deductibility up to $1 million is a potential tax efficiency that s commonly used from a credit perspective. However, you may not be as familiar with the tax benefits of interest expense and depreciation associated with commercial real estate. If you are considering diversifying your asset portfolio to include commercial real estate to stay on track for retirement, it is important to speak with your tax advisor and wealth relationship team prior to making the decision to borrow or not to borrow to fund the purchase. Using Credit Strategies Wisely in Retirement Planning 1

3 3 Supporting your children. If you have children, it may be a given that you re investing a lot of time and money in their growth and well- being. If you have children who are entrepreneurial and looking to start their own business, it s possible that you may have discussions with your children about how to support them in their endeavors. The question of whether and how to provide that help is a struggle many people experience. It brings up many questions: n Is giving the assistance appropriate? n Should you give them cash? n Is it better to leverage your credit on their behalf? n Is it better still to have the child borrow to get credit experience, with you as a co-borrower? n Can you afford to participate if the business is not going to make it or if you might not collect on your loan? For those who do decide to borrow in this situation, it s important to remember to follow all the usual rules of making the credit decision thoughtfully, even though family dynamics and emotions can complicate the transaction. Most importantly, make sure that the amount of credit you re expending will not change your lifestyle or disrupt your wealth plans, especially in light of an impending retirement, if the business isn t successful and you don t get your money back. 4 Preserving your legacy. As retirement approaches, multi-generational patriarchs and matriarchs often move to a wealth preservation phase. It is normal to think about protecting your wealth and your family, putting plans in place to transition your assets to your children and grandchildren efficiently. Credit can be a valuable strategy as you begin to think about estate planning and business succession as well. You may consider protecting your financial legacy with additional life insurance. Bank financing to fund your life insurance premiums may provide a tax-efficient option that allows you to preserve your current cash flow, avoid liquidating your investments, and leverage your wealth to provide future benefits to your heirs or charitable causes. Implementing a suitable premium finance credit structure in a low interest rate environment also may present significant opportunities to lock in interest rates, up to 10 years in some cases. Additionally, life insurance premium financing may provide a tax-free benefit that is not included in your estate and further help protect your net worth by facilitating the transition of your financial legacy to future generations. Hypothetical Scenario: Over the last 35 years, Peter, a respected and philanthropic businessman in his community, has accumulated wealth by successfully building an extensive portfolio of office and retail commercial real estate properties. He has a long and established financial relationship with his wealth relationship team that has helped him manage his growing assets and where he has borrowed over the years to finance his commercial properties. By making the decision to finance his real estate purchases, Peter has managed his cash flow so that he was always prepared to take advantage of great investment opportunities as they came along. Integrating credit as a wealth planning strategy proved to be a successful formula for Peter. Peter s family has also grown over the last 35 years; Peter has a grown child and a third grandchild on the way. Now, as Peter nears retirement, he knows that he would like to continue building his commercial real estate portfolio, but, quite naturally, his focus is shifting from his own wealth accumulation to one of creating legacy assets to pass to the third generation of his family. Peter and his wife set up time to meet with their wealth relationship team to discuss an optimal approach to his changing goals. After discussing his wealth and retirement plans, his wealth relationship team, along with his legal and tax advisors, help Peter and his wife establish irrevocable trust structures and create family limited partnerships in the names of their grandchildren. Given Peter s successful financial history and his own comfort with using leverage over the years, he is interested in and able to continue to borrow to build his legacy portfolio. With the family limited partnership as the borrower, Peter puts successful borrowing strategies in play to purchase additional real estate properties, accumulating wealth outside his estate and creating a future income stream for his grandchildren when they are grown. Due to his lifetime financial stewardship and by working with his relationship team to set his plans in motion, Peter is able to approach retirement with confidence, continuing to use credit as a valuable financial tool to realize his goals and dreams. 2 Using Credit Strategies Wisely in Retirement Planning

4 As with any borrowing strategy, there are risks associated with life insurance premium financing. We encourage you to read our white paper titled, Preserving Your Financial Legacy with Life Insurance Premium Financing, and talk to your tax advisors before making any decisions. 5 Considerations when integrating credit in retirement planning. The decision to continue to integrate credit into your financial plan has less to do with age or life stage than it does personal preference or comfort with strategic credit usage. Even someone who has $500 million in liquid assets may choose to take out a mortgage when purchasing a home, preferring to have a low-cost mortgage while putting cash to better use elsewhere. Part of that personal preference relates to your tolerance for risk. Risk tolerance as you transition to retirement, from wealth accumulation to preservation, will naturally become more conservative. It s the same risk tolerance that drives your investment accounts in this stage of life. As you make your transition to retirement, consider the following: n Align your retirement planning with the appropriate risk philosophy, n Do the math: consider all your options to optimize your wealth plan, n Work with your wealth relationship team and your tax advisor to integrate credit efficiencies into your plan, n Meet with your wealth relationship team regularly and adjust your plan as needed to confidently meet your retirement goals. The bottom line is that borrowing as you approach or enter retirement relies on using the same habits that created your success to this point. With many active years in front of you, credit can still be used appropriately within the broader scope of your overall wealth management plan. By working with your wealth relationship team, credit used strategically can continue to help you confidently and efficiently meet your important financial goals even as you prepare for the golden years of retirement. Using Credit Strategies Wisely in Retirement Planning 3

5 Disclosures. Wells Fargo Private Bank provides products and services through Wells Fargo Bank, N.A. and its various affiliates and subsidiaries. Wells Fargo Bank, N.A. (the Bank ) offers various advisory and fiduciary products and services. Wells Fargo affiliates, including Financial Advisors, LLC, a separate non-bank affiliate, may be paid an ongoing or one-time referral fee in relation to clients referred to the Bank. The role of the Financial Advisor with respect to Bank products and services is limited to referral and relationship management services. The Bank is responsible for the day-to-day management of the account and for providing investment advice, investment management services, and wealth management services to clients. The views, opinions, and portfolios may differ from our broker dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. Wells Fargo Advisors is the trade name used by two separate registered broker dealers: Wells Fargo Advisors, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, non-bank affiliates of Wells Fargo & Company. The information and opinions in this report were prepared by Wells Fargo Private Bank. Information and opinions have been obtained or derived from sources we consider reliable, but we cannot guarantee their accuracy or completeness. Opinions represent Wells Fargo Private Bank s opinions as of the date of this report and are for general information purposes only. Wells Fargo Private Bank does not undertake to advise you of any change in its opinions or the information contained in this report. Wells Fargo & Company affiliates may issue reports or have opinions that are inconsistent with, and reach different conclusions from, this report. Wells Fargo & Company and its affiliates do not provide legal advice. Please consult your legal advisors to determine how this information may apply to your own situation. Whether any planned tax result is realized by you depends on the specific facts of your own situation at the time your taxes are prepared. All loans are subject to credit approval. Insurance products are offered through Wells Fargo & Company affiliated non-bank insurance agencies. Wells Fargo will not serve as trustee of an irrevocable life insurance trust if the loan is underwritten by Wells Fargo Bank, N.A. Nominations of Wells Fargo to serve as trustee of an irrevocable life insurance trust are subject to pre-acceptance review by Wells Fargo. This report is not an offer to buy or sell, or a solicitation of an offer to buy or sell the strategies mentioned. The strategies discussed or recommended in this report may be unsuitable for some clients depending on their specific objectives and financial position. Securities-based lending has special risks and is not suitable for everyone. If the market value of your pledged securities declines below required levels, you may be required to pay down your line of credit or pledge additional eligible securities in order to maintain it, or the lender may require the sale of some or all of your pledged securities. The sale of pledged securities may cause you to suffer adverse tax consequences. You should discuss the tax implications of pledging securities as collateral with your tax advisor. Wells Fargo Advisors and its affiliates are not tax or legal advisors. All securities and accounts are subject to eligibility requirements. Please read all lines of credit documents carefully. The proceeds from an asset-backed line of credit may not be used to purchase additional securities or pay down margin. Real estate investments carry a certain degree of risk and may not be suitable for all investors Wells Fargo & Company. All rights reserved. Member FDIC. NMLSR ID WM29858 ( /15)