Credit can be a valuable tool to meet one's wealth goals.
Many of Canada’s wealthiest individuals and their families are no strangers to the red side of the ledger.
They’re comfortable with debt, even though they have ample assets—often more than enough for their needs and those of future generations. It’s a sophisticated strategy to build and protect their wealth, says Cynthia Laverdiere, director of Ultra-High-Net-Worth Credit at RBC Private Banking in Montreal.
“High-net-worth clients understand the benefits of using credit. Many will use credit facilities to the maximum extent possible to reinvest and diversify their assets, from marketable securities to direct purchases of operating companies.”
As Canadians look for ways to meet their wealth goals, for themselves and as part of legacy planning, credit can sometimes be overlooked. Leveraging it can be a key tool, and prudent use of private banking lending facilities can play a major role in funding a legacy. These facilities go far beyond mortgages, lines of credit and high-limit credit cards.
While private banking clients typically don’t have to use credit, they often choose to do so to their advantage. “High-net-worth clients tend to use it on a discretionary basis to create more wealth,” says Kim Mason, executive vice president and head at RBC Private Banking.
For example, clients with significant home equity might leverage it to buy an investment property or help their children purchase their first home in high-cost markets like Toronto or Vancouver, she adds.
Private banking can help create a road map to achieve those goals, finding the right credit solutions and strategies for a client’s unique circumstances.
Many clients are surprised by the evolving credit strategies they can access through private banking, especially those who have only recently achieved a certain level of wealth that exceeds their retirement needs. One strategy involves using credit facilities for insurance needs as part of a strategic approach to estate planning and business succession.
“Rather than directly paying life insurance premiums themselves, which can be very large sums, private banking clients can borrow to pay those premiums using an immediate financing arrangement,” says Andrej Titan, vice president of credit for RBC Private Banking.
The strategy allows clients to purchase a life insurance policy for themselves without having to liquidate their investment portfolio. Instead, they borrow to cover up to 100 percent of the premium, paying only interest on the loan. Upon the insured individual’s passing, the loan is paid back from a portion of the benefit, with the remainder used to provide liquidity to the estate.
The concept is popular with business owners, Mr. Titan notes. Their business purchases a life insurance policy, which allows them to deduct the interest charges against taxes owed by the company. When the owner passes away, the residual benefit is disbursed to the estate or other shareholders in a tax efficient manner.
Many other strategies are available to high-net-worth private banking clients. Some clients benefit from structuring investment lines of credit for tax advantages. Others will manage interest rate risk through interest-rate swaps on large variable-rate lines of credit. Still other clients seek financing support, in tandem with estate freezes, to facilitate younger generations taking ownership of a family business. The common thread is leveraging credit for wealth creation and preservation.
With their often-complex lives, wealthy clients have long relied on private banking strategies for help simplifying their finances, convenience and elevated services. They value prudent advice around the use of credit strategies, Ms. Mason says. She describes how RBC clients receive the personal attention of a private banker and a dedicated support team to create a customized wealth-management experience.
A true team approach to each client speaks volumes, Ms. Laverdiere adds. “The success we help clients achieve is a combination of all the expertise we have in-house, and the number of partners we work with alongside clients, from their lawyers and accountants to their family offices. Our organizational structure allows us to respond to clients’ needs quickly, with credit strategies tailored to their needs and goals.”
Discover how RBC Private Banking can help you leverage credit to achieve your wealth goals.
This article was originally published in The Globe and Mail .
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