Illiquid assets can potentially be unlocked to provide the liquidity needed to help facilitate your wealth goals
Senior Custom Credit Banker
Wells Fargo Bank, N.A.
Senior Custom Credit Banker
Wells Fargo Bank, N.A.
Have you reviewed your illiquid asset portfolio with your advisor and discussed the impact those assets may have on your short-term and long-term financial goals?
Illiquid assets are those you own where the ability to sell them is limited or restricted compared to liquid assets that can be easily converted to cash. Examples you may be familiar with include a business, limited partner interests in private equity or hedge funds, or restricted or concentrated stock. Others may be a surprise, such as collectibles including fine art, cars, coins, etc., or even that favorite painting in the family room.
The reasons these assets are illiquid are varied, but in many instances tax consequences or investment restrictions make the sale of these assets costly or impossible. For collectables, you may need to factor in a personal or emotional connection. Art collections, in particular, tend to be special buy and hold investments. But you may not realize you can potentially have the best of both worlds; you may be able to access a portion of the capital tied up in an expensive piece of artwork while still gaining enjoyment from it.
Regardless, illiquid assets carry the same risks as any other investments, and those risks are important for you to consider as you develop your financial goals in many areas, such as:
- Cash-flow planning and access to liquidity
- Concentrated risk and asset diversification
- Estate, tax, and succession planning strategies
- Gifting and philanthropy
Developing and implementing specific goals related to illiquid assets can be challenging, as in many cases, cash or liquidity may be required to implement the strategy.
As you work with your advisor to develop a plan for your illiquid asset portfolio, you should consider that a portion of the capital tied up in these assets can potentially be unlocked to provide the liquidity needed to facilitate your strategic financial goals.
Working in partnership with a Custom Lending Specialist, your advisor can introduce you to the possibility of a multi-year line of credit based on the fair market value of some of the illiquid assets in your portfolio. Not every asset will qualify, but there are custom loans available secured by fine art, limited partner interests in private equity, and at times, private, restricted, or concentrated stock investments. Please note the value of your investments can change over time, and if the value declines, you may be required to pledge additional collateral or pay down the loan.
Consider the flexibility a line of credit secured by an illiquid asset may provide as you develop your goals and include the following topics in your discussions with your advisor as you plan for 2025.
Cash-flow planning and access to liquidity
As you talk to your advisor about the tax implications of selling investments versus borrowing against them to meet short-term liquidity or cash-flow requirements, consider expanding that conversation to include your illiquid assets.
Concentrated risk and asset diversification
Ask about how a line of credit can potentially be used to purchase other types of investments (marketable securities, commercial real estate, etc.) to balance out your financial profile and diversify your investment portfolio.
Estate, tax, and succession planning strategies
Any significant illiquid asset you own, including an art collection, should be part of your estate, tax, and succession planning strategies. There are many strategies to consider, and your planning advisors can help you develop a strategy for your specific situation. Regardless of the strategy, know that access to capital from your line of credit is a source of liquidity that can be used to implement your plan.
Gifting and philanthropy
Finally, consider whether you want to gift any of your illiquid assets, including your art collection, while you’re still alive. Talk to your advisors about any tax benefits that may accrue as a result. Additionally, think of what you want your legacy to be. How will such gifts help cement this legacy for you and your family for years to come?
Whether you are seeking to generate cash flow, diversifying your wealth, thinking about estate planning or your philanthropic goals, your illiquid assets may play a greater role in helping you to achieve your financial goals than you may have realized. When you meet with your advisors, talk to them about this area of your life and ask questions about your illiquid assets and your investment plan. Ask them to introduce you to specialists who may help you unlock their additional potential.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. This communication cannot be relied upon to avoid tax penalties. Please consult your tax and 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 tax return is filed.
