When parents want to help their children buy a home, they are often stymied by the myriad gift and other tax considerations which make providing for their children a difficult task. Recently, with the assistance of Scott W. Hazard, a Senior Vice President at GuardHill Financial, and a financial planning associate, our firm was able to circumvent the obstacles and provide a "clear path" to generous parents for effecting real assistance to their children.
There follows a description of how this transaction was structures:
1. The generous parents form an Limited Liability Company (the "LLC"). The parents became the Managers of the LLC and are majority Members. The Operating Agreement for the LLC provided that the parents put substantially all of the cash required to close the purchase into the LLC. The children are also Members under the Operating Agreement but only to the extent of a few thousand dollars, which entitled them to a small share of the interest in the LLC.
2. The LLC entered into the Purchase and Sale Agreement for the purchase. The LLC also became the Mortgagor when the purchase closed. Disclosure of all aspects of the transaction was made to the Mortgage lender, and the only extra document the Lender required were the personal guarantees of all four Members of the LLC.
3. The transaction took place in 2008. Prior to the end of the year, each of the parents made gifts of $26,000 to the children. These gifts were made in the form of amending the Operating Agrement to increase the percentage interest of the children as Members of the LLC. The parents intend to make similar gifts in 2009 and thereafter, until the home is 100% owned by the children.
4. Because of the size of the gifts, no gift tax return was required of the parents and the parents were not forced to use up any of their lifetime transfer exclusion. If the children are able to develop additional funds, they may make payments to the parents at any time to increase their Member ownership. It is generally advisable for the parties to obtain an appraisal of the home from time to time to make an accurate measure of the value of the Member transfers.
Even in today's sometimes difficult real estate market, parents want to assist their chuildren to become homeowners. The LLC route described herein is one which has many advatages, and I would recommend that any parents who are inclined to assist their children in attaining home ownership consider it.