Estate and Legacy Planning Considerations

Assisting your child in buying their first home is a growing trend for many parents, especially given the cost of entry into homeownership in recent years. Loaning funds for a down payment, gifting the entire purchase price of a home, or transferring the ownership of a home directly can provide an adult child with a strong financial foundation. However, from a financial and estate planning perspective, these transfers should be carefully thought out and structured to ensure they align with your overall objectives, protect family harmony, and avoid unintended tax or legal consequences.

If a home is transferred to an adult child, an asset will be removed from your balance sheet, and the corresponding expenses will be eliminated from your budget. A cash gift could remove valuable liquidity from your retirement and legacy planning. A loan created between you and your child would replace the cash given to the child on the balance sheet and is still considered an asset of your estate. Thus, any such transaction will result in shifting assets on the balance sheet and cash flow in the budget and should be viewed holistically in the context of the estate and legacy plans.

A Will or Living Trust should be reviewed and adjusted accordingly with any of the above activities. Suppose multiple children are in line to inherit from your estate. How will assisting one child affect the inheritance of other children, assuming any estate plan created has an objective calling for an equal distribution of wealth among heirs? 

Assisting one child may create perceived inequity among heirs, and time should be spent before the transaction exploring how giving, loaning, or transferring property might affect family dynamics and legacy goals. 

Your Will or Living Trust should clearly state whether the gift is considered an advancement on the recipient’s inheritance or an outright gift outside the estate. Without any clarification, other heirs may dispute the fairness or intent of your action. Utilizing a clause in a Will or Living Trust, adding prior gifts into the estate calculation, and redistributing the remainder to ensure equitable outcomes is one way to safeguard fairness. If adjusting estate distributions would create liquidity issues or emotional conflict, parents could equalize using life insurance proceeds or other property.

If a loan was created from parent to child, the Will or Living Trust should specify whether the estate forgives the loan, and if so, whether the loan amount should be accounted for in the final distribution of estate assets. Documenting gifts and loans and keeping accurate records will be important to justify the legitimacy of your actions.

Gifting property also means giving up complete management and control of the property. This can result in asset protection issues, exposing the gift now owned by the child to creditors, divorce, or other lawsuits or claims. Instead of a direct gift, a parent could place the real property into a trust to shield the property from certain legal entanglements. This can keep the property off a child’s balance sheet and avoid exposure to claims, while providing direction and management guidelines.

Another option to transfer ownership of real property is to utilize an entity, such as an LLC or Family Partnership. Transfers of membership or partnership interests over time can convey indirect ownership. Any claims or lawsuits associated with the property are isolated within the entity, protecting other balance sheet assets from potential claims. 

Transferring interests in the entity over time can assist the parent in maintaining some level of control, at least while they remain the majority interest holder. Discounted gifts of the LLC or Family Partnership over time may also be available, which can be structured to use less of the gift tax exemption. This strategy can be very effective in preserving the gift and estate tax exemption if this is an objective or priority.

Transparency is key in estate planning decisions involving gifts or loans. If not communicated properly, these transfers can strain and complicate family relationships. And, if you’re not there in the future to explain your decisions or help resolve disagreements, it can lead to lasting animosity that may never be resolved. It is recommended that family meetings be conducted, disclosing transfers and intent. A letter of intent drafted to explain objectives and intentions behind gifts of cash, real estate, or the creation of a loan could also be used. Although not legally binding, clarity and emotional closure can be provided within these letters.

Gifting a home or assisting a child in buying a home can help transfer wealth in an organized and thoughtful fashion. There are ways to structure the gift or loan to maximize potential tax benefits or provide asset protection while supplying some management or control around your wishes. But such a transaction must be contemplated on how it fits into the broader picture. 

Whether it’s equalizing among heirs or preserving family harmony, thoughtful documentation and clear communication can be critically important. A seasoned estate planning attorney and accountant should be consulted when considering such gifts. 

At Peak Asset Management, we prefer to be at the epicenter of these types of conversations and planning. We offer holistic and comprehensive financial, tax, and estate planning, which includes advising clients on complex gifting and loaning strategies. We will analyze the effect a gift or loan will have on a balance sheet and cash flow, and review estate planning documents and tax planning strategies to assist clients in making informed decisions with confidence.         

Jason Foster, Director of Wealth Strategies and Legacy Planning