Avoiding the Gift Money Tax Liability by Pledging Assets

Posted by on Wednesday, December 12th, 2012 at 7:08am.

When working on purchase transactions with gift money, I frequently see delayed regret from generous family members once they've had a chance to speak with their accountant and determine their gift tax liability. The moment of reckoning often arrives when they're asked to sign a letter (required by all lenders) verifying that the money they're offering represents a non-refundable gift. As gift taxes can add up to significant sums, the fact that the lender will not be sharing this information with the IRS provides limited comfort. (The gift-maker is the one who is responsible for reporting this information.) For those who are not willing or able to suffer the tax burden associated with gift funds, there may be a more palatable alternative in the form of "pledged" assets.

Individuals with significant savings or investments may be able to pledge a portion of their portfolios as collateral in lieu of cashing in assets and incurring a gift tax liability. Other benefits include avoiding potential capital gains, and the option of not needing to reduce their holdings or dividend income. The pledged assets essentially serve to guaranty or offset increased credit from the lender.

Here is an example of how such a loan might be structured:

  • Purchase price is $1,000,000.
  • Child's down payment funds are $100,000.
  • Amount needed to finance the purchase is $900,000, for a 90% loan-to-value (LTV) ratio.
  • Parent can pledge $200,000 (20% of purchase price) to enhance the lender's standard 70% LTV allowance.
  • The child's loan will be $900,000, guaranteed by $200,000 from the pledged account.

Loans as high as $5,000,000 are offered on this program, however the pledged percentages needed increase from 20% to 35% for higher loan amounts.

Here are some of the lender requirements for this program:      

  • The Buyer's 10% down payment must be from their own funds (unless gift money is offered to cover this portion!) and they need 12 months' seasoned reserves to cover all housing payments and liabilities.

Pledged Assets:

  • Retirement accounts are not eligible.
  • Pledged assets must be located in only one account.
  • Liquid accounts are given full credit ($200,000 = $200,000 collateral).
  • Stocks are given half credit ($400,000 stock value is needed for $200,000 collateral).
  • Stocks must be publically traded with a share value of at least $5.

The loans supporting this program are competitively priced ARMs, with pledged assets secured until the loan is paid off or paid down to meet the lender's standard loan-to-value requirements. Although the loss of full authority over one's pledged assets may prove unacceptable to some, others will consider the ability to avoid capital gains and gift taxes, as well as the option of keeping their full portfolio and dividend income intact to be a relative bargain.

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