Wealthy client wanted to help a child with a home purchase. Client could pay cash for the home but wanted to provide assistance in the most cost-effective manner and safeguard the client’s remaining lifetime gift tax exemption. Arnall Golden Gregory’s Private Wealth Practice suggested to the client that the client should loan the money to the child instead of buying the house or giving the child the money for the purchase.
The client had made prior large gifts, so buying and gifting the home to the child or giving the funds to the child to enable the purchase would have exhausted the client’s lifetime gift-tax exemption, leaving no room for future gifts or planning techniques that would use the lifetime gift-tax exemption. The child did not have a strong credit history, but that issue became moot because the lender was a parent. Providing a secured loan with a nine-year term would lock in an exceptionally low interest rate, making the child’s payments more manageable and minimizing the client’s additional income tax on loan interest. The client was not concerned about having a security interest in the loan, but by securing the mortgage with the child’s primary residence, the child was able to deduct the interest payments made to the client. In addition, securing the loan made it more bona fide, which is especially important with intra-family transactions because they receive greater scrutiny from the IRS than unrelated-party transactions. Arnall Golden Gregory attorneys worked with the client’s financial advisor and the closing attorneys to close the transaction.
By loaning money to the child instead of making an outright gift, the client preserved the client’s lifetime exemption while providing assistance to the child. The child received a low-interest loan with minimal closing costs and was now able to take advantage of deductible interest payments while building a credit history. The client is receiving taxable interest income from the loan, but because the interest rate is so low, the income tax impact is minimal.