How Wealthy Parents Buy Homes for Adult Children, Save Taxes With Loans

  • Asset-backed loans were boosted by low interest rates and a scorching real estate market.
  • For wealthy parents, these loans are a way to pass on their wealth to their children at a lower cost.
  • Banks are targeting baby boomers looking to help their millennials buy their first home.

Every week for the past 14 months, wealth advisor Aaron Bell has had to help his wealthy clients buy homes.

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, with 43% of Millennials in a 2018 Legal & General survey reporting that they have received financial assistance from their family. But the rich and the rich, with savvy advisers, are able to make cash offers by borrowing from their investment portfolios – and save on taxes in the process.

With loan interest rates as low as 2%, clients can save money by taking out title loans they don’t need, rather than liquidating their stocks and paying heavy taxes on them. -values.

“We are coming out of a period of 13 years

bull market
run, ”Bell, an advisor at Cannataro Family Capital Partners, a Northwestern Mutual company, told Insider. “Every parent should take a break from selling stock to buy the house. ”

The housing market has boosted borrowing against securities

Equity Lines of Credit (SBLOCs) have been popular for years thanks to low interest rates, but the feverish 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 at sales firm Van Leeuwen & Co, told Insider. .. “These types of SBLOC loans are quick because you don’t have to go through all the underwriting of a mortgage because you are using the value of your account as collateral.”

You don’t have to be super-rich to take out a line of equity credit, but they can only be taken against non-retirement assets and usually have a higher minimum than margin loans, which , unlike SBLOCs, can be used to buy stocks. . Larger lines of credit usually result in lower interest rates as well.

Biggest savings come from avoidance of capital gains tax

In high-tax states like California, where total federal and state capital gains taxes are close to 40% for the highest earners, taking out a loan instead of liquidating securities is a given, Charity Falls, manager of wealth planning at Union Bank, mentioned.

In the Falls experience, the parents usually retain title to the property in their own name and ultimately give it to the child directly or in trust.

The estate tax exemption is $ 11.7 million, which means less than 2,000 American families need to worry about it, but there is a way to reduce the value of their estate by using these loans, a Falls told Insider. If a parent sells the property, or any property, to a child and the child gives them a promissory note in return – a legal document promising that the borrower will repay a loan – the child does take the original loan, and the estate includes only the debt remaining on the death of the parents, and not the property itself.

For most clients, it serves to save on income tax rather than inheritance tax.

“It can be used by anyone as a tax planning strategy,” she said.

Banks are looking at this trend

GS Select, a private banking division of Goldman Sachs, issued more than $ 8 billion in loans this year, with real estate accounting for half the volume, according to division co-head Whit Magruder. Parents who pledge their investment accounts with their child as a borrower is a tax-efficient way to pass on assets before death.

“It’s one way to start the transfer of wealth between generations,” he told Insider.

BNY Mellon Wealth Management and Merrill Lynch both offer their clients 100% financing with cash and marketable securities, as well as property as collateral.

Through Merrill Lynch’s Parent Power Program, clients can pledge up to $ 5 million in securities on behalf of their adult children or a close relative. They can use the loan to pay off a house in cash and then take out a mortgage later. The child is the borrower and pays off the mortgage balance unless their income is too low to qualify.

With JPMorgan’s secured asset mortgage product, clients do not have to pay for private mortgage insurance – which is required when buyers make down payments less than 20% of the purchase price of the home – or less than 20% of the purchase price of the home. make a deposit. These lines are also secured by the value of the property, which means that as it appreciates, the dependence of the adult child on the patrimony of his parents decreases.

“As the value of the house increases, the dependence on the parents’ wallet decreases and, ultimately,” the liquid assets “could be released,” Vince La Padula, global head of Lending solutions for wealth management at JPMorgan Private Bank, Insider said.

Loans have conditions

Clients can usually trade the assets in their account while they have a loan against them, but the transfer of cash or securities must be approved by the lender. If the value of the wallet drops, clients may be asked to repay part of the loan or add more money to their account.

According to Bell, brokers will usually call if your pledged assets drop by 25% or more, and if the value drops below the value of the loan, you may only have 30 days to pay it off before your loan is due. account is sold and you will be billed for any unpaid difference.

Although market fluctuations of this magnitude are rare, Bell recommends that some clients hedge their bets by taking out loans in combination with selling assets to make large purchases.

“It’s hard to imagine that the market will stay at these highs forever,” Bell said. “Take back the victory. We cannot just be greedy pigs. ”

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