Shenkman Law

August 18, 2023

It is fairly common for a client to ask how an irrevocable trust might help a beneficiary to buy a house. There are many different options for how to handle this common transaction. The path of least resistance – to have the trust just make a distribution to the child so that the child could buy the house - is arguably the least appropriate option from an asset protection perspective. If the child ends up divorcing, the ex-spouse may end up owning the house. Such a result is unlikely to have been what the family would ever have intended. Further, outright distributions to a beneficiary child may not be optimal from a tax perspective. Many of the irrevocable trusts involved are structured to be outside of everyone’s estate and even generation skipping transfer (“GST”) tax exempt. In such trusts, wealth can grow (perhaps forever!) outside the transfer tax system. An outright distribution undermines what was likely a primary benefit when the trust was created.   As an alternative, a client might consider the implications of having the trust loan the beneficiary money to buy the house. Such a loan could have very favorable terms, e.g. no interest to a beneficiary (what tax complications does that create?), low interest at AFR, repayment terms structured to match the beneficiary’s earnings, etc. Such an arrangement would arguably protect the value of the loan for transfer tax and divorce protection. It might also give the client opportunities to create additional protections for trust assets, mitigate state income taxes, and equalize among other beneficiaries of the trust. This program will explore many different options from a legal, tax, family harmony and other perspectives. The focus will be on practical solutions advisers can bring to clients for this common planning question.   Speakers: Martin Shenkman, Esq. and Joy Matak, JD, LLM, Sax LLP head of Trusts & Estate’s Practice. Featured Charity: American Cancer Society.