Large Tax Bill - Use Security Based Lending

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Ladiman
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Joined: Mon Feb 22, 2021 6:49 pm

Large Tax Bill - Use Security Based Lending

Post by Ladiman »

My first post but really enjoying the group so would love thoughts on this. We recently sold out company so have a windfall. I have a pretty significant tax bill. (over $1mil) and see that Schwab offers a Pledge Assist Line. They will provide a credit line based on the equities you have at Schwab. Here is the overview. They will loan 70% against equity. It is LIBOR 30 day (currently .12) + 1%. I can pay off my tax bill and keep the money in market (using 3 fund).

Aside from market tanking and triggering sells (I would get buffer). Any thoughts?
ryman554
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Re: Large Tax Bill - Use Security Based Lending

Post by ryman554 »

I have no idea what you are suggesting.

However, if you had a windfall from the sales of business or something...

1. You should have been paying quarterly taxes unless, I guess, you have a safe harbor from last year.
2. You should have stuck your "tax money" estimates in a savings account or something and NOT invested it.

Why you are paying your income taxes on margin is beyond me.
qwertyjazz
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Re: Large Tax Bill - Use Security Based Lending

Post by qwertyjazz »

Aside from the biggest risk what are my other risks? Might want to describe buffer. A sale could trigger other tax bills
G.E. Box "All models are wrong, but some are useful."
DetroitRick
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Re: Large Tax Bill - Use Security Based Lending

Post by DetroitRick »

Welcome to the forum and congratulations on the sale windfall. That is very impressive!

I've looked at Schwab's Pledged Asset Line, but more for my future use. I have not used it. You nailed it - the biggest risk is that the loan gets called. Their words, it can get called " At any time, including in the event that the loan value of collateral is insufficient to satisfy the minimum loan value of collateral or to support the outstanding loans,...".

I would evaluate that in terms of how much a collateral buffer your securities represent, how long you expect to carry this, and what options you would have should it ever not be working out for you. Against that, it's fast to get (so I've heard anyway), easy to get, flexible, and cheap. Presumably you already know it isn't a margin loan and can't be used to purchase securities or pay off margin loans. But you have a perfectly acceptable use, and these really aren't restrictive anyway.

I would shop alternatives (these and other loan types) before deciding, but this might work for you. It's a personal thing, but I think my biggest consideration beyond the buffer would be how LONG I might need it. One thing - your statement of Libor + 1%. That caught my eye. Are you sure? While these are usually cheap, I'm seeing on the Schwab website that for loans $1 to $2.5 mil, today's Pledged Asset rate is Libor + 2.25%. Still cheap, though.

Best of luck!
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cchrissyy
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Re: Large Tax Bill - Use Security Based Lending

Post by cchrissyy »

I don't have one but have looked at it seriously and might still do it

I wouldn't like it for long term use, and it sounds like you are describing a long run plan and not a short term liquidity need. The thing is, any assets you want to be the collateral have to be moved to a new account and you give Schwab complete authority to sell them - not only in a market crisis but also you give them the right to change the rate and terms at any time. They also have the full discretion to end the program and demand full payment of the balance. That makes me nervous about the product for anything other than short-term use.

https://www.schwab.com/public/file/P-95 ... 3IS-00.pdf
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nalor511
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Re: Large Tax Bill - Use Security Based Lending

Post by nalor511 »

DetroitRick wrote: Tue Feb 23, 2021 2:03 pm Welcome to the forum and congratulations on the sale windfall. That is very impressive!

I've looked at Schwab's Pledged Asset Line, but more for my future use. I have not used it. You nailed it - the biggest risk is that the loan gets called. Their words, it can get called " At any time, including in the event that the loan value of collateral is insufficient to satisfy the minimum loan value of collateral or to support the outstanding loans,...".

I would evaluate that in terms of how much a collateral buffer your securities represent, how long you expect to carry this, and what options you would have should it ever not be working out for you. Against that, it's fast to get (so I've heard anyway), easy to get, flexible, and cheap. Presumably you already know it isn't a margin loan and can't be used to purchase securities or pay off margin loans. But you have a perfectly acceptable use, and these really aren't restrictive anyway.

I would shop alternatives (these and other loan types) before deciding, but this might work for you. It's a personal thing, but I think my biggest consideration beyond the buffer would be how LONG I might need it. One thing - your statement of Libor + 1%. That caught my eye. Are you sure? While these are usually cheap, I'm seeing on the Schwab website that for loans $1 to $2.5 mil, today's Pledged Asset rate is Libor + 2.25%. Still cheap, though.

Best of luck!
Not that cheap. I think Interactive Brokers is cheaper
MarkerFM
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Re: Large Tax Bill - Use Security Based Lending

Post by MarkerFM »

I've used margin loans in the past to fund large things that I know would have a finite life. For example, buying a house while waiting to sell another. I also sold companies for a large windfall with a large tax bill. I put the tax money in a money market account and held onto it as long as I could without incurring a penalty. I would never have even considered borrowing at a short-term rate to buy a long-term, potentially volatile asset with no exit plan.
humblecoder
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Re: Large Tax Bill - Use Security Based Lending

Post by humblecoder »

Ladiman wrote: Tue Feb 23, 2021 8:39 am Aside from market tanking and triggering sells (I would get buffer). Any thoughts?
That's like asking "other than that, how was the play Mrs. Lincoln?" There are no other thoughts that could compare to the risk that you just mentioned!
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auv-ee
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Re: Large Tax Bill - Use Security Based Lending

Post by auv-ee »

cchrissyy wrote: Tue Feb 23, 2021 2:23 pm I don't have one but have looked at it seriously and might still do it

I wouldn't like it for long term use, and it sounds like you are describing a long run plan and not a short term liquidity need. The thing is, any assets you want to be the collateral have to be moved to a new account and you give Schwab complete authority to sell them - not only in a market crisis but also you give them the right to change the rate and terms at any time. They also have the full discretion to end the program and demand full payment of the balance. That makes me nervous about the product for anything other than short-term use.

https://www.schwab.com/public/file/P-95 ... 3IS-00.pdf
We are in the process of applying for a Schwab PAL. Today we received the actual documents to sign (not just the applications, which we had seen previously). The "Pledged Asset Line Agreement" and the "Pledged Asset Line Collateral Control Agreement" are not comforting documents. I read them both today, and I agree with the issues cchrissyy raised, and then some. First, these are "agreements" in the sense that you agree (are bound) to many things, and Schwab agrees to very little, if anything. Note that these are not contracts (as I understand a contract), because Schwab does not sign them; there are not two parties. Further, as cchrissyy notes, Schwab reserves the right to change the PAL Agreement at any time without your approval; and while notice is required, there is no required phase-in period (such as "changes to be effective after X days"). Basically, you agree to be bound by future unilateral changes in the agreement. [Conversely, changes to the Collateral Control Agreement (between Schwab Bank, the lender; Schwab Brokerage; and you) actually do require approval from the borrower.]

The Collateral Control Agreement, together with the PAL Agreement, allows Schwab Bank at any time to invoke a "Period of Exclusive Control" or a "Demand". The former allows them to make trades in the PAL account (Entitlement Orders), while blocking you from doing so, and "... Schwab Bank may issue an Entitlement Order that instructs Schwab Brokerage to sell assets in the Pledged Account without applying the proceeds of such sale to the Obligations." There is no follow-up saying what else Schwab bank can do with the proceeds; probably it just means that they can leave the cash in the PAL Account, but it doesn't say so. A Demand can require immediate payment of any outstanding loan and fees, along with a 3% increase in the interest rate spread. There is no statement in either the PAL Agreement or the Collateral Control Agreement defining any conditions that allow Schwab to use either of these interventions, such as a relation between the value of any outstanding loan and the loan-value of the pledged assets. These provisions can be invoked at any time for any reason, and in combination, without notice or a time period for remedies.

Again, as cchrissyy notes, the index used for the base interest rate (currently still 30-day LIBOR) and for the offered initial spread can each be changed at any time for any reason.

In the PAL Agreement, the borrower indemnifies Schwab "against any and all loss, liability, damages, judgments and costs (including attorneys’ fees)
of any kind relating to or arising directly or indirectly out of ..." a broad list of things that are not restricted to faults of the borrower. Effectively, it seems, Schwab takes no responsibility for anything.

There are more things of concern, but those are the biggest, in my mind.

--

We may yet continue with the PAL. One must keep in mind both the magnitude and probability of risk. Risks here are high, not just for market fluctuation, but also for committing to an unknowable future agreement, and the possibility of Schwab invoking its Control, Demand or other remedies without an agreed event such as a drop in pledged asset loan-value. The probability of these non-market risks occurring is likely very low; Schwab could not maintain this PAL business if they behaved unpredictably, but nothing in the Agreements prevents it.
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auv-ee
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Re: Large Tax Bill - Use Security Based Lending

Post by auv-ee »

auv-ee wrote: Sun Jun 13, 2021 12:01 am There is no statement in either the PAL Agreement or the Collateral Control Agreement defining any conditions that allow Schwab to use either of these interventions, such as a relation between the value of any outstanding loan and the loan-value of the pledged assets. These provisions can be invoked at any time for any reason, and in combination, without notice or a time period for remedies.
I should add that the SEC has general advice on a Securities Backed Line of Credit (SBLOC), which is the general term for Schwab's trademarked "Pledged Asset Line":

https://www.sec.gov/oiea/investor-alert ... sbloc.html

This document implies, without requiring, that a SBLOC agreement should should be a contract (presumably requiring the the signature of the lender), and should specify the conditions under which the lender can issue a Maintenance Call (Schwab's Demand); see Item (1) in the linked document. The PAL Agreement together with the PAL Addendum (giving the specifics of pledgor, borrower, initial interest rate, etc.) contain no such language, leaving the borrower with no clear way to manage the loan to minimize risk.
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galawdawg
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Re: Large Tax Bill - Use Security Based Lending

Post by galawdawg »

Putting money you currently owe the IRS into the market and instead using a loan to pay your indebtedness is unwise.

You should (or should have) set aside the appropriate portion of your "windfall" sufficient to satisfy your tax obligations as uninvested cash. If you didn't, I'd suggest you sell what you need to now, put it in a savings account and get going on your quarterly estimated tax payments.
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