“Gifting up” and Loan Strategies for Helping Parents with Financial Needs

  • Wealthy children are increasingly “gifting up” or providing loans to help support their parents’ living expenses or health care costs while reaping potential tax and estate planning benefits.
     
  • Loans, which must be repaid-with interest, are among the simplest ways to provide financial support.
  • Gifts of assets can be the right choice under certain conditions and may provide income tax benefits if the assets have appreciated in value.
  • Trusts established to benefit parents are another option that offers potential income tax benefits and can continue to benefit the donor child after the parents’ lifetime.

Wealthy children have options for supporting their parents

While “gifting down” to younger generations has historically been the norm, it’s now increasingly common for children to accumulate more wealth than their living parents. This provides an opportunity for children to “gift up” or provide loans to help support parents —  while pursuing income and estate tax planning. Consider the following strategies and their corresponding pros and cons.

Loans to parents or family members

Loans can be the simplest way to provide financial support to parents or other family members with minimal tax consequences. A key advantage: A loan doesn’t reduce the lifetime gift tax exemption, currently $11.4 million, or $22.8 million for married couples ($11.58 million per person, or $23.6 million per couple in 2020). In addition, a loan need not have limitations on how proceeds are used and interest costs can be lower than commercial rates.

The downside to this option is that the loan must eventually be repaid with interest. Otherwise, the IRS would consider this a gift subject to limits under the lifetime gift tax exemption — and, once the exemption is exceeded, gift tax must be paid. Consider getting help with drafting a promissory note with a fixed repayment schedule at the applicable federal rate (AFR), which is the minimum rate the IRS allows for private loans. 

Funding a loan by borrowing against low-basis investments

Instead of selling appreciated stock or other securities with embedded tax consequences, consider using securities as collateral to obtain a commercial loan or line of credit. You may be able to borrow between 50 percent and 95 percent of eligible assets. Remember: The value of securities used as collateral could be affected by changes in financial markets or interest rates.

Gifting assets can potentially save on estate tax 

Wealthy children may be able to provide a gift of assets to their parents for living expenses, while simultaneously reaping tax benefits. This strategy works best for children whose estates exceed the federal estate tax exemption amount and whose parents have an estate below the federal exemption, including the gifted assets. 

Gifting up is also prudent income tax planning when the assets have a low-cost basis. If a parent holds the low-basis assets for more than a year, the assets receive a step-up in cost basis upon the parent’s death, eliminating capital gains that would otherwise be due upon sale. However, this tax-saving technique is not allowed if the parent dies within one year of receiving the assets.

Creating a trust to gift up

Younger generations can create a trust to benefit their parents, funding it with investment securities that have increased in value. If the trust is included in the estate of the last parent to die, the assets can receive a step-up in basis for income tax purposes after the second parent’s death. The trust can be set up so the assets continue to benefit the donor child. If the trust is created to be exempt from Generation-Skipping Transfer Tax, the assets can avoid transfer tax at the child’s death, and for future generations until the trust finally terminates. Creating a trust comes with an important caveat: The assets could be depleted during the parents’ lifetimes to pay for health care or other living expenses.

Planning gifting strategies with siblings

Relations among siblings can be challenging, particularly when there are large disparities in wealth, a family business or differing relationships with parents. Before implementing any parental support strategy, it’s important for siblings to discuss the options and reach agreement on the best solution. The family’s bonafide efforts to support older generations should not become the cause of strained relationships.

Next Steps

Ask your Glenmede Wealth Planner to conduct a Goals-Based Wealth Review, which can help you determine whether your assets are sufficient to meet your lifetime needs and support your parents. Your advisors can help you determine whether gifting up or a loan should be considered in your tax and estate planning. 

For more information, contact your Wealth Advisor.

This material is intended to be a review of issues or topics of possible interest to Glenmede Trust Company clients and friends and it is not personalized investment, estate planning, tax or legal advice. Advice is provided in light of a client’s applicable circumstances and may differ substantially from this presentation. This material may contain Glenmede’s opinions, which may change without notice after date of publication. Information gathered from third-party sources is assumed reliable but is not guaranteed. This publication may not be used as legal or tax advice.