Living off of margin loans

[ncbill]

Most margin loans will get a margin call when the loan balance is about 50% of your nest egg. Lenders are not stupid. Suppose you originally have $1M nest egg and you borrow $250K on a margin loan as living expenses over the years. Let’s assume a 50% crash occur and your $1M nest egg becomes $500K. Therefore this will trigger a margin call which you are forced to payoff the margin call and now your $500K nest egg becomes $250K. The market then recovers and your $250K nest egg is now $500K.

On the other hand…. If a investor drawdown his $1M by $250K for living expenses the traditional way….the nest egg is now $750K. The 50% crash occur and his $750K nest egg is now $375K. The market recovers so the $375K nest egg returns to $750K . This is more than the $500K example above. This is because a margin call will effect your investment recovery after a crash.

I personally like $750K better than $500K in this situation of a 50% crash.

You seem to be assuming 100% equities.

You can borrow on margin against other securities like bonds as well, not just equities.

And is a abrupt, 50% crash in equities really a plausible scenario?

IIRC, that's worse than even the Great Recession.

 

[2177V]

You seem to be assuming 100% equities.
You can borrow on margin against other securities like bonds as well, not just equities.
And is a abrupt, 50% crash in equities really a plausible scenario?
IIRC, that's worse than even the Great Recession.

I only used this unlikely situation to illustrate the risk. The risk of a 50% crash is NOT zero. In any case, I am more concerned about the risks in the following language by clifp in his comment #116:

"Schwab Bank reserves the right to change any part of the interest rate after the PAL is established, including the index rate, Interest Rate Spread, or post-Demand spread."

You will never see this type of language in a home mortgage loan. This is because home mortgage loans are highly regulated by the government to protect the borrower. I do not see similar government protection for investors who take out margin loans.

This is because the government likes to protect the economy and ordinary workers......however, investors tend to be the last group of people for the government to protect because investors take risks.

Just ask the investors who bought GM stock when GM was facing bankruptcy during the financial crisis. The government bailed out GM to save jobs...but then they let the GM stocks become worthless....and later they allowed GM to issue "new" stock. This means some speculators who thought the government was going to save GM will also save their investment. They were right about saving GM but they were wrong about saving their GM stock investment.

You are welcome to take those risks by taking out a margin loan against your nest egg that I have cited in my previous comments. However, those risks are NOT zero and exceed my own risk tolerance.

 

[Winemaker]

Back in 1989, I had a chance to buy a vehicle at a great price, we were a little cash pinched at the time. Took out a margin loan to pay for the car, portfolio doubled in 8 months. I sold the stock, paid off the loan, had a nice car, and still made a nice return.

I had beginner's luck, and even though I'm much wealthier, I'm too chicken at these market levels. I'm up $500,000 for the past year, and $33,000 since last Friday close.

 

[2177V]

Back in 1989, I had a chance to buy a vehicle at a great price, we were a little cash pinched at the time. Took out a margin loan to pay for the car, portfolio doubled in 8 months. I sold the stock, paid off the loan, had a nice car, and still made a nice return.

I had beginner's luck, and even though I'm much wealthier, I'm too chicken at these market levels. I'm up $500,000 for the past year, and $33,000 since last Friday close.

Good for you. I have no problem with margin loans on a short term basis. This is because the compounding effect of interest paid is minimal. However long term, your accumulative interest payments of paying interest on interest may even exceed the nominal money that you borrowed. In other words, starting off with a $1M portfolio and taking $250K in living expenses loans may result in a $500K loan balance due to paying interest on interest a lot quickly than people tend to believe. In addition the other risk factors are interest rates which may escalate in the future due to inflation. People can get suckered into thinking low interest rates will last forever. Another risk is the stepped up basis rules may change since the federal government has a debt problem and it is easy for the government to eliminate the stepped up basis for rich people to solve the federal deficit. However making short term margin loans eliminate most of these risk factors. I hate to see people work hard for a decent portfolio…only to give most of it away in interest payments and unexpected taxes that may have to be paid by their children.

 

[ncbill]

I only used this unlikely situation to illustrate the risk. The risk of a 50% crash is NOT zero. In any case, I am more concerned about the risks in the following language by clifp in his comment #116:

"Schwab Bank reserves the right to change any part of the interest rate after the PAL is established, including the index rate, Interest Rate Spread, or post-Demand spread."

You will never see this type of language in a home mortgage loan. This is because home mortgage loans are highly regulated by the government to protect the borrower. I do not see similar government protection for investors who take out margin loans.

This is because the government likes to protect the economy and ordinary workers......however, investors tend to be the last group of people for the government to protect because investors take risks.

Just ask the investors who bought GM stock when GM was facing bankruptcy during the financial crisis. The government bailed out GM to save jobs...but then they let the GM stocks become worthless....and later they allowed GM to issue "new" stock. This means some speculators who thought the government was going to save GM will also save their investment. They were right about saving GM but they were wrong about saving their GM stock investment.

You are welcome to take those risks by taking out a margin loan against your nest egg that I have cited in my previous comments. However, those risks are NOT zero and exceed my own risk tolerance.

No different than the contract language for most any line of credit, including a HELOC...i.e., interest rates are variable and can change at any time.

Were I borrowing via a credit line I'd still rather borrow (up to 25% of portfolio) at around 1% via a margin loan from IB instead of (next cheapest option) via a HELOC, which after any teaser rate period (90-180 days) has interest rates that are several times higher.

 

[ERD50]

The warnings in recent posts have merit, this is not a process to take lightly, there are risks.

However, the context of the OP was for the "ultra rich". They probably have lots of income coming from dividends, so may only borrow against a LOC for some additional expense. It's probably a small fraction of their pledged securities. They aren't going to face a margin call, and are in high tax brackets, the securities have probably been held a long time with a low cost basis, so high tax to sell them.

Most of the rest of us in the thread are talking about using them in a small way, in some cases (mine included), to cover cash flow until RMDs/SS kick in, so I can max my Roth conversions. That loan might be ~ 10% of the pledged securities for me at the end of 5 years. And with RMD, pension and SS that will exceed my likely expenses, I can pay it down in two or three years if I want.

Yes, interest rates will probably rise, but if I'm only holding for 7~8 years , I doubt that will be too big an issue.

And if the market drops? A lot of my bond allocation is my T-IRA, so as I sell for that RMD, I'd be selling bonds. Same as any other sale.

So I'm not worried, I think it will pay off in tax benefits for me. And if rates are still low, I may take my time to pay it off, freeing more excess for gifting to kids or charity.

-ERD50

 

[2177V]

No different than the contract language for most any line of credit, including a HELOC...i.e., interest rates are variable and can change at any time.

Were I borrowing via a credit line I'd still rather borrow (up to 25% of portfolio) at around 1% via a margin loan from IB instead of (next cheapest option) via a HELOC, which after any teaser rate period (90-180 days) has interest rates that are several times higher.

Not entirely true for a Bank of America HELOC which I have. My Bank of America HELOC contract states the following:

Margin: -0.175
Index: Independent Prime Rate as published in Money Rates Table in the Wall Street Journal

Yes, the interest rates can change. However, there are set rules...so that Bank of America do NOT directly control my interest rates. Bank of America has to charge me the Money Rate Table in the Wall Street Journal and then add or subtract the margin.

Anytime a lender can directly control your interest rate, then there is a clear CONFLICT OF INTEREST because the interest rates are not independent of the lender. This is a characteristic of a loan shark.

Now read the margin loan language again:

Schwab Bank reserves the right to change any part of the interest rate after the PAL is established, including the index rate, Interest Rate Spread, or post-Demand spread.

Schwab Bank now have direct control over your interest rates and they are not using an "independent" index rate. This means Schwab Bank can potentially change the index rate to double the Wall Street Index Journal independent rate. What is even worst they can increase the margin rate too!!! If the Independent Index Interest rate by the Wall Street Journal is 5%, I will be paying 4.825% on my HELOC according to my contract. Meanwhile, Schwab Bank can potentially make "their" Index 10% and make "their" margin another 10% for a total of 20% which is credit card territory. They will not do it now...but whenever Schwab bank is stressed financially in the future which generally happens during a crash then the SHTF.

People who take out a Margin Loan better read the fine print and not assume a variable interest rate is a variable interest rate for ALL financial institutions and all variable interest rate loan products are the same. They are not. Schwab Bank is very clever.

 

[2177V]

However, the context of the OP was for the "ultra rich". They probably have lots of income coming from dividends, so may only borrow against a LOC for some additional expense. It's probably a small fraction of their pledged securities. They aren't going to face a margin call, and are in high tax brackets, the securities have probably been held a long time with a low cost basis, so high tax to sell them.

Most of the rest of us in the thread are talking about using them in a small way, in some cases (mine included), to cover cash flow until RMDs/SS kick in, so I can max my Roth conversions. That loan might be ~ 10% of the pledged securities for me at the end of 5 years. And with RMD, pension and SS that will exceed my likely expenses, I can pay it down in two or three years if I want.

Yes, interest rates will probably rise, but if I'm only holding for 7~8 years , I doubt that will be too big an issue.

-ERD50

Good analysis. There are two sides: The benefit versus the risk. People must balance both. When an individual tout the benefit side WITHOUT mentioning the risk side, then I have to speak up.

As I stated previously, I have no problem with margin loans for a short term duration. However, long term I do have a problem. You are correct is that the super rich has more resources. I am not super rich but I actually borrowed $20K on a cash advance on a credit card at 18% annual interest in order to close escrow on a 100% cash offer on a house. I only needed the money for a month so paying the 1-1/2% interest was acceptable to me on a short term loan. I would never do that for a long term loan.

The super rich has the luxury of having huge pool of liquidity so they can wheel and deal. However, for people who are not super rich, those people has to be more careful on reading a loan agreement if the loan is intended for the long term. If the SHTF, they should have liquidity (other than their nest egg) to pay off the margin loan in a heartbeat. If they do not have that other liquidity, then they should have a backup plan. No extra liquidity? No backup plan? ....then that is their decision.

 

[Koolau]

Good analysis. There are two sides: The benefit versus the risk. People must balance both. When an individual tout the benefit side WITHOUT mentioning the risk side, then I have to speak up.

As I stated previously, I have no problem with margin loans for a short term duration. However, long term I do have a problem. You are correct is that the super rich has more resources. I am not super rich but I actually borrowed $20K on a cash advance on a credit card at 18% annual interest in order to close escrow on a 100% cash offer on a house. I only needed the money for a month so paying the 1-1/2% interest was acceptable to me on a short term loan. I would never do that for a long term loan.

The super rich has the luxury of having huge pool of liquidity so they can wheel and deal. However, for people who are not super rich, those people has to be more careful on reading a loan agreement if the loan is intended for the long term. If the SHTF, they should have liquidity (other than their nest egg) to pay off the margin loan in a heartbeat. If they do not have that other liquidity, then they should have a backup plan. No extra liquidity? No backup plan? ....then that is their decision.

I suppose the super-rich are that way because they've learned how to play these games (including, in some cases, using margin loans for living expenses from time to time.) I just can't relate. If I WERE super rich, I think I would worry even LESS about such things (especially about maximizing my wealth by playing games.) To me, a main reason to be wealthy is so that I don't need to worry about having enough money. Back to the adage of still playing the game after you have already won. I make no judgement of anyone else. It's just not something I would consider if I did not have to. YMMV

 

[ERD50]

I suppose the super-rich are that way because they've learned how to play these games (including, in some cases, using margin loans for living expenses from time to time.) I just can't relate. If I WERE super rich, I think I would worry even LESS about such things (especially about maximizing my wealth by playing games.) To me, a main reason to be wealthy is so that I don't need to worry about having enough money. Back to the adage of still playing the game after you have already won. I make no judgement of anyone else. It's just not something I would consider if I did not have to. YMMV

But few among us can really know if we have won. What if an expensive health issue comes up that requires large OOP amounts to help maintain quality of life? A lawsuit depletes 3/4's of our assets? A family member could use financial assistance?

I can understand not wanting to use this technique, I'm kind of on the fence myself, but I'm still going to do it, I think a modest amount is a good strategy for me.

-ERD50

 

[2177V]

I suppose the super-rich are that way because they've learned how to play these games (including, in some cases, using margin loans for living expenses from time to time.) I just can't relate. If I WERE super rich, I think I would worry even LESS about such things (especially about maximizing my wealth by playing games.) To me, a main reason to be wealthy is so that I don't need to worry about having enough money. Back to the adage of still playing the game after you have already won. I make no judgement of anyone else. It's just not something I would consider if I did not have to. YMMV

The super rich tend to diversify their wealth into (1) a large portfolio of equities and bonds (2) ownership of multiple businesses (3) ownership of multiple real estate properties. (4) ownership of gold, art, antique cars, etc. In other words, their wealth can easily be transferred from one asset class to another whenever necessary. If a margin loan goes bad, he can transfer his equity in his properties to pay off that problem loan. Therefore they are in a position to take more risks. Ordinary folks do not have the same resources. When ordinary folks attempt to take similar risks as the super rich, bad things tend to happen because with limited resources, you have a limited capacity to solve a high risk loan that has gone bad. The super rich also have connections to financial institutions that provide special loans because the super rich have so much collateral. This translate to an ocean of liquidity that allow them to take “high risk” margin loans off their stock and bonds. I will never take out a “high risk” margin loan simply because I understand my limitations of my overall wealth.

 

[ncbill]

Not entirely true for a Bank of America HELOC which I have. My Bank of America HELOC contract states the following:

Margin: -0.175
Index: Independent Prime Rate as published in Money Rates Table in the Wall Street Journal

Yes, the interest rates can change. However, there are set rules...so that Bank of America do NOT directly control my interest rates. Bank of America has to charge me the Money Rate Table in the Wall Street Journal and then add or subtract the margin.

Anytime a lender can directly control your interest rate, then there is a clear CONFLICT OF INTEREST because the interest rates are not independent of the lender. This is a characteristic of a loan shark.

Now read the margin loan language again:

Schwab Bank reserves the right to change any part of the interest rate after the PAL is established, including the index rate, Interest Rate Spread, or post-Demand spread.

Schwab Bank now have direct control over your interest rates and they are not using an "independent" index rate. This means Schwab Bank can potentially change the index rate to double the Wall Street Index Journal independent rate. What is even worst they can increase the margin rate too!!! If the Independent Index Interest rate by the Wall Street Journal is 5%, I will be paying 4.825% on my HELOC according to my contract. Meanwhile, Schwab Bank can potentially make "their" Index 10% and make "their" margin another 10% for a total of 20% which is credit card territory. They will not do it now...but whenever Schwab bank is stressed financially in the future which generally happens during a crash then the SHTF.

People who take out a Margin Loan better read the fine print and not assume a variable interest rate is a variable interest rate for ALL financial institutions and all variable interest rate loan products are the same. They are not. Schwab Bank is very clever.

If anything IB is subsidizing their margin rates, hardly the behavior of a loan shark, much less proof of a conspiracy to jack up their current margin rates literally 20x overnight, & to what purpose?...to ensure everyone pulls their investments?

Again, that HELOC rate is going to be several times what you would currently pay on a margin loan from IB.

 

[2177V]

If anything IB is subsidizing their margin rates, hardly the behavior of a loan shark, much less proof of a conspiracy to jack up their current margin rates literally 20x overnight, & to what purpose?...to ensure everyone pulls their investments?

Again, that HELOC rate is going to be several times what you would currently pay on a margin loan from IB.

You will be surprised what a financial company will do in order to survive. Your plan will depend on a bull market lasting forever and that a severe bear market will never happen. I can pay off my HELOC anytime I want using other assets that I have available if the interest rates get out of hand. The question is whether people can pay off their margin loan using other assets separate from their nest egg. If they can’t, then they wasted money by paying interest on accrued interest. In a HELOC, you never pay interest on accrued interest because there is a minimal payment that you have to make to the lender from your other income,

Another point: You can only borrow 50% of your nest egg in your stock/bond portfolio. This means borrowers do not utilize the other 50% of the stock/bond portfolio nest egg. What will people do when the loan balance hit that 50%? Do they have a plan or have other resources like the super rich?

I prefer to withdraw my stock/bond portfolio the traditional way and if necessary to zero because I have other assets to keep me going such as my pensions, SS, rental property income and business income. Therefore I utilize 100% of my stock/bond portfolio in my retirement, avoid paying interest on accrued interest which will compound your debt, and ultimately I will have a higher standard of living during retirement versus people who can only utilize only 50% of their stock/bond portfolio. The wasted money by paying interest on accured interest which can potentially offset any tax advantages.

I find it amazing that people will develop a retirement plan based on a stepped up basis tax loophole. If the government decide to close that tax loophole by eliminating the stepped up basis in the future, then the plan of avoiding taxes gets crushed and you end up paying both interest on accrued interest and the taxes that you were trying to avoid.

Taxes in retirement are reduced somewhat because the government does not require taxes for a married couple over 65 until it is over $23,300. ($11,950 for a single person over 65). It is more likely that the government will close the stepped up basis loophole than the minimal income tax break. Even if they closed both, people who had already taken advantage of the minimum income tax break will not get taxed retroactively while closing the deferred stepped up basis will destroy those people’s plan who were depending on the stepped up basis tax loophole in the future.

 

[geeky_grrl]

Taxes in retirement are reduced somewhat because the government does not require taxes for a married couple over 65 until it is over $23,300. ($11,950 for a single person over 65). It is more likely that the government will close the stepped up basis loophole than the minimal income tax break. Even if they closed both, people who had already taken advantage of the minimum income tax break will not get taxed retroactively while closing the deferred stepped up basis will destroy those people’s plan who were depending on the stepped up basis tax loophole in the future.

It isn't really an either or for tax breaks. I would still use the 0% federal income tax bracket if I took margin loans - there is about $50k tax free for cap. gains and qualified dividends for a single person. I'm just looking for strategies to improve the tax efficiency for the rest of my withdrawals.

 

[2177V]

It isn't really an either or for tax breaks. I would still use the 0% federal income tax bracket if I took margin loans - there is about $50k tax free for cap. gains and qualified dividends for a single person. I'm just looking for strategies to improve the tax efficiency for the rest of my withdrawals.

If tax efficiency is what you are looking for....then be advised that my Certified Public Accountant's advice is gold to me. She looked at my investments and gave me great strategies to reduce my tax burden at a consultation fee of about $120 per hour.

For example: I wanted to transfer $500K of wealth to my children and she stated that instead of giving $500K to my children which will trigger a gift tax...simply loan them that same money and connect that loan to buying a house. Use the $500K to buy a house with 100% cash.

Make out an auditable re-payment schedule with the minimal interest allowed by the government for them to pay me back and this makes it a legal loan to purchase a house. However, I can forgive part of the legal loan each year that is under the gift tax limitation. The limitation is $15K per person to person. A couple to couple gift limitation is $60K because I gift $15K to my daughter and $15K to my son-in-law. My wife does the same. The lifetime gift limitation is $11M.

The loan balance that is connected to buying a house is decreased by $60K each year until the loan balance goes to zero. They do not have to pay an income tax on this loan nor do they pay a gift tax since the gifts are under the gift limitations. The interest they pay me is even tax deductible at their end since we have a legal loan connected to buying a house. I do have to pay taxes on the interest that they pay me according to the re-payment schedule because that is income on my end. My CPA stated that as long as I have the auditable paperwork, the IRS can't object since I am playing by the IRS tax rules of home loans and gift tax limitations.

This is an example how a Certified Public Accountant can find loopholes in the tax laws. I do not like FA because FA are not familar with tax loopholes and likes to sell me financial products while a CPA is more in the business of doing taxes.

 

[jazz4cash]

People who take out a Margin Loan better read the fine print and not assume a variable interest rate is a variable interest rate for ALL financial institutions and all variable interest rate loan products are the same. They are not. Schwab Bank is very clever.

No different than a HELOC. Isn’t your BofA HELOC at prime minus .175 still multiples higher than a 1% margin loan ? Given, I’m pretty sure the loan and/or AUM has to be humongous to get a 1% rate.

 

[NW-Bound]

If tax efficiency is what you are looking for....then be advised that my Certified Public Accountant's advice is gold to me. She looked at my investments and gave me great strategies to reduce my tax burden at a consultation fee of about $120 per hour.

For example: I wanted to transfer $500K of wealth to my children and she stated that instead of giving $500K to my children which will trigger a gift tax...simply loan them that same money and connect that loan to buying a house. Use the $500K to buy a house with 100% cash.

Make out an auditable re-payment schedule with the minimal interest allowed by the government for them to pay me back and this makes it a legal loan to purchase a house. However, I can forgive part of the legal loan each year that is under the gift tax limitation. The limitation is $15K per person to person. A couple to couple gift limitation is $60K because I gift $15K to my daughter and $15K to my son-in-law. My wife does the same. The lifetime gift limitation is $11M.

The loan balance that is connected to buying a house is decreased by $60K each year until the loan balance goes to zero. They do not have to pay an income tax on this loan nor do they pay a gift tax since the gifts are under the gift limitations. The interest they pay me is even tax deductible at their end since we have a legal loan connected to buying a house. I do have to pay taxes on the interest that they pay me according to the re-payment schedule because that is income on my end. My CPA stated that as long as I have the auditable paperwork, the IRS can't object since I am playing by the IRS tax rules of home loans and gift tax limitations.

This is an example how a Certified Public Accountant can find loopholes in the tax laws. I do not like FA because FA are not familar with tax loopholes and likes to sell me financial products while a CPA is more in the business of doing taxes.

I think the real advantage of the above scheme is that your children get to enjoy the benefit of that $500K all at once, instead of having to wait until they inherit it upon your death.

You can also buy the house outright under your name, and gradually transfer the property deed over, as described here: https://listwithclever.com/real-estate-blog/how-to-avoid-gift-tax-on-real-estate-5-things-to-know/.

About income taxes, hopefully your children get more out of the deduction than the tax that you pay for the interest of the loan.

 

[2177V]

No different than a HELOC. Isn’t your BofA HELOC at prime minus .175 still multiples higher than a 1% margin loan ? Given, I’m pretty sure the loan and/or AUM has to be humongous to get a 1% rate.

The point is that a margin loan interest rate for Schwab Bank could be 1% today but 20% tomorrow because Schwab Bank can change the index and the margin. I will let the other readers compare the language of the Schwab Bank margin loan with the BofA HELOC. Let them decide for themselves which interest rate offers more protection.

As I stated previously, I have the resources to liquidate any HELOC debt or other debt with my other assets. If a borrower does NOT have similar other assets to payoff a margin loan debt (other than their nest egg), then they are playing a dangerous game by putting their nest egg at risk.

 

[2177V]

I think the real advantage of the above scheme is that your children get to enjoy the benefit of that $500K all at once, instead of having to wait until they inherit it upon your death.

You can also buy the house outright under your name, and gradually transfer the property deed over, as described here: https://listwithclever.com/real-estate-blog/how-to-avoid-gift-tax-on-real-estate-5-things-to-know/.

About income taxes, hopefully your children get more out of the deduction than the tax that you pay for the interest of the loan.

My children are in their twenties and I am retired. $500K means a lot to them. The tax deduction that they will get also means a lot to them. Meanwhile, I can easily afford the taxes that I have to pay on the interest earned.

There are many ways to transfer wealth to children with minimal taxes but I needed a CPA to select the right one. What appealed to me is that they will never pay rent or a mortgage payment in their life. My daughter is even renting the extra bedrooms to her fellow students at college. Being a landlord and getting rent checks is better than paying rent or a mortgage. Each dollar is worth a lot more when you are young.

 

[liberty53]

If tax efficiency is what you are looking for....then be advised that my Certified Public Accountant's advice is gold to me. She looked at my investments and gave me great strategies to reduce my tax burden at a consultation fee of about $120 per hour.

For example: I wanted to transfer $500K of wealth to my children and she stated that instead of giving $500K to my children which will trigger a gift tax...simply loan them that same money and connect that loan to buying a house. Use the $500K to buy a house with 100% cash.

Make out an auditable re-payment schedule with the minimal interest allowed by the government for them to pay me back and this makes it a legal loan to purchase a house. However, I can forgive part of the legal loan each year that is under the gift tax limitation. The limitation is $15K per person to person. A couple to couple gift limitation is $60K because I gift $15K to my daughter and $15K to my son-in-law. My wife does the same. The lifetime gift limitation is $11M.

The loan balance that is connected to buying a house is decreased by $60K each year until the loan balance goes to zero. They do not have to pay an income tax on this loan nor do they pay a gift tax since the gifts are under the gift limitations. The interest they pay me is even tax deductible at their end since we have a legal loan connected to buying a house. I do have to pay taxes on the interest that they pay me according to the re-payment schedule because that is income on my end. My CPA stated that as long as I have the auditable paperwork, the IRS can't object since I am playing by the IRS tax rules of home loans and gift tax limitations.

This is an example how a Certified Public Accountant can find loopholes in the tax laws. I do not like FA because FA are not familar with tax loopholes and likes to sell me financial products while a CPA is more in the business of doing taxes.

Why does a $500k gift trigger a gift tax if you are still under the $11M lifetime exclusion? I thought you only need to file a form when going over $15k/year?

 

[SecondCor521]

Why does a $500k gift trigger a gift tax if you are still under the $11M lifetime exclusion? I thought you only need to file a form when going over $15k/year?

It doesn't. vchan (or their CPA) was wrong about that.

If one exceeds the annual gift tax exclusion amount (currently $15K per gifter/giftee combination, adjusts for inflation), then one needs to file what's colloquially called a gift tax return on Form 709. Any amount above the $15K (in vchan's scenario this would be $485K) would be deducted from their lifetime exclusion amount (currently $11.7M, adjusts for inflation, and occasionally changed by law, reducing by 50% on 1/1/2026). When vchan passed away, their estate would only be able to exclude $11.685M from estate tax.

Being of a cynical nature, I will note that the CPA has encouraged a situation where vchan might now require accounting and tax services for the life of their intrafamily loan, for which they might have to pay someone $200 per hour to do. And the CPA recommending that approach would be the logical choice to pay for that service. And any other services that might arise in the future.

 

[2177V]

It doesn't. vchan (or their CPA) was wrong about that.

If one exceeds the annual gift tax exclusion amount (currently $15K per gifter/giftee combination, adjusts for inflation), then one needs to file what's colloquially called a gift tax return on Form 709. Any amount above the $15K (in vchan's scenario this would be $485K) would be deducted from their lifetime exclusion amount (currently $11.7M, adjusts for inflation, and occasionally changed by law, reducing by 50% on 1/1/2026). When vchan passed away, their estate would only be able to exclude $11.685M from estate tax.

Giving $1/2M cash to my 20 something daughter was discussed with my CPA,,, but I rejected that option because giving $1/2M cash without strings attached can be a bad idea. You should try giving your own children $1/2M cash without strings and see what happens. You may be disappointed.

I made most of my wealth by being a landlord. This means I used the rent income from one property to help me buy another property. Due to my guidance and my attached strings, my daughter intends to do the same. Ultimately you get to own several properties free and clear. By making out a parent to child loan, she has to give me a monthly payment which forces her to make a budget. Forcing your children to make a budget can be a good thing.

Your post is correct ....but in a sense I was also correct in saying that I avoided a gift tax. But I really avoided filing the required paperwork to the IRS as you pointed out.

This forum is about margin loans and the pluses and minuses associated with a margin loan against a stock/bond nest egg. I am opposed to this idea because you are paying interest on a margin loan, the interest rates can be unpredictable, and you may be putting your stock/bond portfolio at risk especially if that is your only asset.

I only mentioned my loan to my daughter to get people to think about diversifying their wealth beyond a typical stock/bond portfolio. I also have a stock/bond portfolio but recently my net worth increased significantly due mostly to the bull run in property values in California.

 

[RetiredHappy]

Giving $1/2M cash to my 20 something daughter was discussed with my CPA,,, but I rejected that option because giving $1/2M cash without strings attached can be a bad idea. You should try giving your own children $1/2M cash without strings and see what happens. You may be disappointed.

I did give more than half a million to my son and everything good happens! (Qualifier: He needs help financially, and will for the rest of his life...)

 

[2177V]

I did give more than half a million to my son and everything good happens! (Qualifier: He needs help financially, and will for the rest of his life...)

Good for you. Since you probably had filed with the IRS on reporting the $500K plus gift, were you ever audited?

Another reason for me to reject the $500K cash gift to my daughter option and subsequent reporting a $500K gift to the IRS was fear of raising a red flag.

I personally prefer to stay under the IRS radar.

 

[RetiredHappy]

Good for you. Since you probably had filed with the IRS on reporting the $500K plus gift, were you ever audited?

Another reason for me to reject the $500K cash gift to my daughter option and subsequent reporting a $500K gift to the IRS was fear of raising a red flag.

I personally prefer to stay under the IRS radar.

I sent in the completed form. What audit? They would just file it against my IRS record. Not a word back from them.