How wealthy parents buy houses for adult children and save taxes on loans

  • Security-based lending has been boosted by low interest rates and a scorching real estate market.
  • For wealthy parents, these loans are an inexpensive way to pass their wealth on to their children.
  • Banks target baby boomers who want to help their millennial children buy their first home.

For the past 14 months, wealth advisor Aaron Bell has had to help wealthy clients buy a house every week.

Many of them do not buy for themselves but for their adult children. In the United States, it is common for parents to help their children buy their first home. According to a 2018 study, 43% of millennial homeowners say they have received financial support from their families. But the wealthy and wealthy can make cash offers with savvy advisers by borrowing for their investment portfolios – and saving taxes in the process.

With borrowing rates as low as 2%, customers can save money by taking out loans they don’t necessarily need, rather than liquidating their stocks and paying heavy capital gains taxes.

“We come from a 13 year old

Bull market
running, “Bell, a consultant at Cannataro Family Capital Partners, a northwest mutual firm, told Insider.” All parents should take a break before selling stocks to buy the house. “

The real estate market has accelerated borrowing against securities

Security-Backed Lines of Credit (SBLOCs) have been popular for years thanks to low interest rates, but the fever of the real estate market has made them crucial.

“What we are seeing now is that most people have to take cash offers and be ready to close within 30 days,” Jason Field, financial advisor for boutique Van Leeuwen & Company, told Insider. “These type of SBLOC loans are quick because you don’t have to take out all of the mortgage loans as you use your account value as collateral.”

You don’t have to be very rich to borrow a security-based line of credit, but they are only available against non-annuity assets and usually have a higher minimum than margin loans, which, unlike SBLOCs, can be used to buy stocks. Larger credit lines usually also result in lower interest rates.

The greatest savings come from avoiding capital gains taxes

In high-tax countries like California, where total federal and state corporate income taxes for top earners are close to 40%, it’s a breeze to borrow rather than liquidate stocks, said Charity Falls, a senior wealth strategist at Union Bank.

In Falls’ experience, parents usually keep the title in their own name and ultimately give it away to the child, either directly or in trust.

Inheritance tax exemption is currently $ 11.7 million, which means fewer than 2,000 U.S. families to worry about, but there is a way to reduce the value of their assets with these loans, Falls told Insider. If a parent sells the property or asset to a child and the child gives them a promissory note in return – a legal document promising the borrower to repay a loan – the child is effectively taking over the original loan and the estate only includes the residual debt upon death of the parents and not the property itself.

However, for most customers, it is used to save income tax rather than inheritance tax.

“This can be used as an income tax planning strategy by anyone,” she said.

Banks are following this trend

GS Select, a division of Goldman Sachs’ private bank, issued more than $ 8 billion in loans in 2021, with real estate accounting for half of the volume, according to the division’s co-chief Whit Magruder. Parents pledging their investment account with their child as a borrower is a tax-efficient way to pass assets on before death.

“It is a way to start the wealth transfer between the generations,” he told Insider.

Both BNY Mellon and Merrill Lynch offer wealth management clients 100 percent financing with cash and marketable securities and property as collateral.

Merrill Lynch’s Parent Power program allows customers to pledge up to $ 5 million in securities on behalf of their adult children or a close relative. The loan can be used to pay for a home in cash and later take out a mortgage. The child is the borrower and pays back the balance of the mortgage unless their income is too low to be eligible.

With JPMorgan’s mortgage product for pledged assets, customers don’t have to pay for personal mortgage insurance – which is required when buyers make down payments of less than 20% of the home’s purchase price – or a down payment. These lines are also secured by the value of the property, so that with increasing appreciation the dependence of the adult child on the assets of the parents decreases.

“As the value of the house increases, so does the dependency on the parental portfolio and ultimately the [liquid assets] Vince La Padula, global head of credit solutions for asset management at JPMorgan Private Bank, told Insider.

The loans are subject to conditions

Customers can usually trade within their account balance while they have a loan against them, but transfers of cash or securities must be approved by the lender. If the portfolio goes down in value, clients may be asked to either repay part of the loan or add more money to their account.

According to Bell, brokers typically call when your pledged assets drop no less than 25%, and if the value drops below loan value, you may only have 30 days to repay it before your account is sold and charged each Difference pending.

Although market fluctuations of this magnitude are rare, he recommends some customers hedge their bets by borrowing in combination with asset sales to make large purchases.

“It’s hard to imagine the market will stay at these highs forever and ever,” said Bell. “Take the victory. We can’t just be greedy pigs.”

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