In today’s housing market, young adults can struggle to be able to afford their first home. Between high prices and rising interest rates, parents may want to help and provide a down payment or a second mortgage. This assists in not just the down payment, but can help getting approved for a mortgage, avoiding escrow requirements, and get the best possible interest rates on a mortgage.
Family getting into a financial relationship can also be a strain. Such a lovely gesture can be an amazing gift, but parents may need to make their money work for them. If so, parents can use a couple of legal documents to relieve the stress in the situation.
First, a simple promissory note with a reasonable interest rate allows the parents to gift the down payment, and also have monthly income from the payments. Parents would want a Deed of Trust to protect their interest. This debt will likely be a second lien subject to a mortgage company.
Parents can tie up this gift in a big bow by executing a Self-Canceling Installment Note. (“SCIN”) An SCIN is a special kind of debt instrument. It contains a provision that calls for the cancellation of the liability upon the parents’ death during the term of the promissory note.
If the parent dies before the final payment under the SCIN, the automatic cancellation feature kicks in and the debt is forgiven. This reduces the debt of the borrowing child and it also may be part of a full estate plan. A couple keys to make it work and not be an illegal transaction:
1. The term of the SCIN must be years less than your life expectancy, so it is not seen as a private annuity.
2. The terms of the note must take into account the possibility of your death before the note is paid off by including an increased interest rate or an increased principal amount.
Ensuring these terms occur will make sure there are no tax implications for either party. As always, consult legal and tax experts to properly document the transaction and reap all the benefits.
Attorney Mayer is an attorney at Hammerle Finley Law Firm, a boutique law firm offering services in estate planning, probate, guardianship, business law, litigation, and real estate. Contact him at (972) 436-9300. This article does not constitute as legal advice.
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