Transferring Wealth Through Strategic Borrowing
Many individuals seek to transfer their wealth to future generations through the creation of trusts for their children and grandchildren, and for philanthropic purposes. Individuals can secure funds for these transfers through loans backed by their personal assets or assets held within trusts, which can offer several advantages over direct funding.
Four Benefits and Considerations of Different Lending Options
1. Attractive intra-family loan rates
By leveraging intra-family loans, you can secure funds at favorable interest rates, often lower than those available from traditional financial institutions. This can be particularly beneficial for funding trusts and other wealth transfer mechanisms.
Considerations
If the loan is not structured properly, it could be challenged by local tax authorities, which could result in higher taxes or penalties. The Goldman Sachs Lending Team can work with your tax advisor to help inform lending options or tax considerations.
2. Financing annuity payments
Annuity-based structures can benefit from financing to meet their payment obligations. This helps ensure that your preferred financial structure can continue to fulfill its charitable or familial commitments without liquidating assets at inopportune times.
Considerations
If the structured vehicle’s investments do not perform well, it may struggle to meet its payment obligations, even with financing. Additionally, taking on debt can increase the financial risk and complexity of managing a structured vehicle.
3. Minimizing tax implications
Strategic borrowing can help reduce tax liabilities. For instance, by using loans to fund charitable contributions, individuals can take advantage of tax deductions while continuing to maintain control over their assets.
Considerations
If the loan is not used for qualified purposes, the tax benefits could be reduced or eliminated. Additionally, the interest on the loan may not be tax-deductible, which could offset some of the tax savings.
4. Insulating from change of control concerns
Financing can help provide a buffer against the risks associated with asset sales, such as changes in control or market volatility. This can be crucial for maintaining the integrity and value of the transferred wealth.
Considerations
Taking on debt can increase financial leverage, making the asset base more vulnerable to market fluctuations. Additionally, if the borrower is unable to repay the loan, it could lead to the loss of the financed assets and create financial instability.
Strategic borrowing against personal assets or assets held within trusts can offer several advantages over direct funding.
Conclusion
The strategic use of financing in wealth transfer and preservation can be a powerful tool. Whether it's through intra-family loans, annuity payments, or other financial mechanisms, the right strategies can help achieve long-term financial goals while reducing risks and tax implications.
By working with Goldman Sachs advisors and utilizing customized lending solutions, clients can work to effectively and efficiently transfer their wealth to future generations and charitable causes.
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