- The wealthy cashed in during the pandemic's stock market highs. Then came the tax bill.
- Executives are borrowing against their portfolios to pay taxes rather than dipping into their portfolios.
- Morgan Stanley's Kevin Meyersburg explained to Insider why these loans make sense even for the rich.
Many shareholders cashed in when the stock market hit record highs during the pandemic. One problem: the windfalls came with steep capital gains taxes.
The wealthy typically have the cash or assets on hand to pay Uncle Sam, but many turned to loans instead. Kevin Meyersburg, who heads Morgan Stanley's executive-services unit, told Insider that borrowing against portfolios has become increasingly popular thanks to low interest rates.
Securities-based lending for Morgan Stanley nearly reached $76 billion last quarter, up 43% from a year ago, the bank reported in its second-quarter earnings. Loans from the executive-services unit, which services employee compensation plans for corporate clients, were a factor in the surge, according to a source familiar with the bank.
Some of Meyersburg's clients, preoccupied by the pandemic, were caught off guard this tax season after selling stock or real estate, which many executives did after fleeing high-tax-domicile states on the coast for places like Wyoming and Florida.
"A lot of times when we're talking to an executive, they'll say they need to sell some stock for whatever reason, whether it's liquidity or because either their stocks highly appreciated or they know they're going to have a tax bill to cover," he said. "We've been able to use lines of credit and lending rather than selling stock and creating a greater tax liability."
He said taking a loan even for a few months can be useful, giving time to consider whether or not to sell off assets. This tax season is particularly confusing as the Biden administration has proposed a retroactive capital gains tax hike, meaning that gains realized before the end of the year could be taxed at nearly double the current rate.
These types of loans have become more popular in the past few years but the pandemic accelerated the trend due to intervention by the Federal Reserve. For Morgan Stanley's wealth management clients, outstanding securities-based and other nonmortgage loans more than doubled in the past five years to $68.1 billion.
Meyersburg's division has been a sweet spot for the bank, hitting 5.2 million customers, which was expanded by its acquisition of E-Trade in 2020. Business has picked up in the past year and a half as executives, stuck at home, are contacting his team more, which even caught the finance veteran by surprise. He's looking to hire more staff, particularly in relationship management, to keep up with the demand.
"Everyone's thinking executives are busy running their businesses, taking care of families, employees, but what we're seeing is executives, because they're at home as well, are actually much more apt to have a conversation, he said. "We're getting calls from executives at 9:30 at night."