Nurturing the Family Tree

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February 17, 2017

Given the uncertain job market and economic climate, it can be difficult for young people to begin building a life and home of their own.


In such a climate, many well-off parents are considering buying a home for their adult children, both to help their children and as an investment.


“Having a parent purchase a home for their kids can help accomplish a number of things,” says Nancy Hermann, Regional Trust Manager for

U.S. Bank Wealth Management. “It can help with the chemistry of the family, and it can be a portfolio diversifier for the parents.”


Values First


For most high and ultra high net worth families, the cost of a house isn’t an issue — rather, it’s how such a move meshes with the values that parents and grandparents want to communicate to younger generations. Would a home allow a young adult to make his or her way in the world, or send a message that the child doesn’t have to be self-sufficient?

“Taking that idea of purchasing a home a step further and having the young adult pay rent or utilities could also help teach them about responsibilities and accountability,” Hermann notes.


Some families may make an outright gift for part or all of the property cost. One potential benefit of essentially making an advance on an inheritance is the ability to take advantage of the current federal tax exclusion on gifts and estates. Until 2018, each parent may give up to $5,490,000 free of federal gift tax.


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February 17, 2017


Save It for Later


“Other parents may choose to buy a property and allow the adult child(ren) to live there rent-free,” Hermann says. This enables you to help an adult child when they need the aid most. Depending on the home’s location, you might hang onto it as a pied-a-terre after your child has moved on, to take advantage of potential long-term appreciation on the property.


In deciding whether to keep or sell the property after the child no longer occupies the home, it’s also important to weigh financial benefits with your wealth management team, and structure any transaction to take full advantage of potential tax benefits and investment opportunities.


If you decide to rent the property, you may be able to deduct such expenses as repairs, mortgage interest, utilities and depreciation, but your rental income will be taxable. Also, you are less likely to be eligible for an exemption from capital-gains taxes when you sell a property occupied by someone other than yourself.


Buy Using a Family Trust


Advisors at The Private Client Reserve can also help families explore another option: acquiring a house using a family trust, with parents and children as designated beneficiaries. This could be done in a variety of ways, subject to the family trustee's discretion: a child beneficiary could receive an outright distribution; trust assets might be used as collateral on a loan to the child outside the trust; or a loan could be made from the trust. All these options would depend on the trust’s terms. Also, parents might use assets in their investment account as collateral for a loan to the child.


“Options using a family trust might be considered along with using family resources outside the trust. The trust options might be helpful in situations where the child does not otherwise qualify for a conventional mortgage,” says Terry Ruhe, Regional Trust Manager for the Wealth Management group at U.S. Bank.


“Another consideration for a parent is a Qualified Personal Residence Trust (QPRT), which involves transferring or gifting a home into a trust for a time, and in this case, the child could own the home at expiration of the QPRT,” Ruhe explains. 

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February 17, 2017

“When the child receives the home, this type of trust reduces transfer taxes when compared with an outright gift. This option may be attractive to families with estate tax concerns. The idea is to freeze the value of the residence when contributed to the trust, which will hopefully result in significant estate tax savings.”


House Rules


Because parents and their children’s needs change over time, an arrangement that may have once seemed ideal can turn into a source of friction in your family. Agree up front on ground rules to avoid future conflict. 



For instance, consider having your adult child sign a lease ensuring that all responsibilities and home agreements are legally recorded and upheld.


If a QPRT is used, the parents could lease the residence back from the adult child at fair market value when the child receives the house at the end of the trust’s term, thereby allowing the parents to live in the house. This should be understood up front, as some families might find this awkward.


Because there are pros and cons to each arrangement, discuss the options with your wealth management advisor and tax and legal advisors at the beginning of the process — long before any problems arise with expectations and emotions.

Wealth Transfer