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Many of our clients want to facilitate their child's purchase of a home. In doing so, there are several options to consider:
- Loan the child some or all of the money, and secure it with a promissory note and mortgage
- Loan the child the money, using loans from trusts
- Give the child the money, using distributions from trusts
- Give the child the money, using assets from your current estate
While each of these options offers unique benefits, there are also pitfalls that may be incurred without proper planning and asset management. When determining how to best facilitate your child's purchase of a home, please consider the following:
- If you use options 3 or 4, these gifts will be deducted from your unified gift and estate tax exemption, which (in 2026) totaled $15 million cumulatively during life and after death.
- For a mortgage, the funds being used must belong to the applicant. Therefore, if you plan to use options 3 or 4, make sure to give your child the money at least 60 days before they apply for a mortgage. Mortgage underwriters look for funds that are borrowed or gifted via large deposits; after 60 days, these funds are considered the child's funds, despite the source.
- Options 1 and 2, both variations of intra-family loans, allow
for a significant amount of money to be transferred to a family
member without gift and estate tax implications. These loans can
generally be structured to benefit both the lender and the
recipient. However, the IRS is vigilant in checking that these
loans are not just camouflaged gifts. In order to avoid problems
with the IRS, and potential gift and estate tax repercussions, make
sure to:
- Verify that the borrower is capable of repaying the loan.
- Make the borrower sign a promissory note and provide collateral.Charge interest on the loan at or above the minimum "safe harbor" rate that is published monthly by the IRS.
- Create and implement a fixed repayment schedule; keep detailed records of this.
- Do NOT write out a plan to forgive missed payments, as this is indicative of a git.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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