February 14, 2022

Meet your liquidity needs while staying invested

February 14, 2022
Jason Britton
Margin lending Investment Finance Transactor

Tax bills and other obligations can put a strain on your liquidity, but you don't have to hold excess cash or sell assets to address this challenge.

Benjamin Franklin famously opined that the only two certainties of this world seemed to be death and taxes. Of course, while death is a once-in-a-lifetime experience, taxes are typically due regularly and often. While their occurrence may typically be predictable, such obligations can still pose significant challenges. This is true even for the world’s wealthiest individuals and families. Great wealth and well-diversified portfolios are not necessarily synonymous with liquid resources. In fact, the most efficiently allocated investors may have very little spare cash. The bottom line: tax season can trigger a liquidity crunch for almost anyone.

So, what might you do if you’re facing substantial liabilities that require ready cash? (This might not just be for personal, property or business taxes – it could also be for a capital call in relation to a private equity investment, for example.) You could, of course, keep a large pool of cash on standby at all times.

But with interest rates near historic lows, the opportunity cost of this is high. Over time, holding excess cash may mean missing out on new investment opportunities as well as the potential to earn compound returns. In the long run, your wealth compared to other investors may suffer.

Another possibility is to liquidate some of your financial assets to meet your obligations. However, this too may be less than ideal. In General, Citi Private Bank recommends a core investment portfolio be fully invested for the long term.

Selling down parts of it here and there may cause imbalances in your portfolio, increasing risks and lowering your potential returns. Also, selling a profitable investment to settle today’s tax bill may trigger a further tax liability down the line.

Rather than holding large amounts of cash or disturbing your core investment portfolio, you might also consider seeking a revolving line of credit. Margin lending allows you to borrow against the value of your investment portfolio at competitive rates, while also keeping it fully allocated. Such a facility has no expiry date, giving you access to liquidity on an ongoing basis. To help manage your cash flow further, interest-only terms may also be possible.

Beyond tax obligations, a margin loan may also help address other liquidity needs, including: real estate acquisitions, debt refinancing and consolidation, business expansion, and lifestyle or luxury purchases.

For all of its potential advantages, margin lending is not for everyone. To determine whether this type of financing is suitable for you, we first undertake an assessment of your overall situation. This includes analyzing your other liabilities, assets, and cash flow.

We can also help you  understand and estimate the risk of facing a potential margin call – the obligation to post further collateral if market moves cause your portfolio’s value to decline. By applying risk management to your line of credit, we believe you can borrow conveniently and cost-effectively, while continuing to seek long-term returns in your core portfolio.

To learn more about the possibilities of a margin lending, please contact your Private Banker.

Not all products and services are available in all locations.
The risk of loss in financing a transaction by deposit of collateral is significant. You may sustain losses in excess of your cash and any other assets deposited as collateral with the lender or the lender's agent. Market conditions may make it impossible to execute contingent orders, such as "stop-loss" or "stop-limit" orders. You may be called upon at short notice to make additional margin deposits or interest payments. If the required margin deposits or interest payments are not made within the prescribed time, your collateral may be liquidated without your consent. Moreover, you will remain liable for any resulting deficit in your account and interest charged on your account. You should therefore carefully consider whether such a financing arrangement is suitable in light of your own financial position and investment objectives. You are not entitled to choose which securities or other assets in your account(s) are liquidated or sold to meet a margin call. The firm can increase its margin requirements at any time and is not required to provide you advance written notice. You are not entitled to an extension of time on a margin call. Citi has the right to demand repayment of a demand facility at any time, for any reason or no reason. All credit products are subject to credit approval. Mortgage products and services are provided by Citibank, N.A., NMLS ID 412915. A mortgage commitment is subject to credit approval, a satisfactory sales contract, property appraisal, title search, mortgage insurance, if applicable, and fulfillment of all closing conditions. To be eligible for these services, you must qualify as a Citi Private Bank client. Call 1-800-667-8424 for information about service for those who are not eligible for private banking. To ensure quality service, calls may be monitored or recorded. Nothing contained herein should be construed as a commitment to lend by Citibank, N.A. or any affiliates.
Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.