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Financial Blunders Grandparents Should Avoid with Grandchildren

Grandparents often find immense joy in supporting their grandchildren, whether by funding education, contributing to major milestones, or simply providing for day-to-day needs. While these gestures can create lasting memories, an article from the AARP explains that financial missteps can lead to unintended consequences. Grandparents can balance generosity with financial security by understanding potential pitfalls and adopting thoughtful strategies.

Overextending Finances and Other Common Financial Mistakes Grandparents Make

One of the most common errors grandparents make is giving more than they can afford. This often happens out of a desire to help with significant expenses, like college tuition or housing. While the intention is noble, overcommitting financially can jeopardize retirement savings and long-term stability. Grandparents must evaluate their financial capacity before making significant commitments. Consulting with a financial advisor can clarify how much they can comfortably give without endangering their financial health.

Co-Signing Loans

Co-signing a loan for a grandchild, whether for a car, education, or personal use, can have serious implications. If the grandchild is unable to make payments, the financial burden falls on the grandparent, potentially damaging their credit score or creating unexpected debt. It’s essential to understand the risks before co-signing any financial agreement. Alternatives, such as contributing smaller amounts directly toward the loan, can provide support without the same level of risk.

Giving Unequally Among Grandchildren

Favoritism, whether intentional or perceived, can strain family relationships. For instance, funding one grandchild’s college tuition while offering no support to others can lead to resentment or conflict. To avoid these issues, grandparents should strive for fairness, considering equitable ways to help all grandchildren. Transparency about financial decisions and the reasoning behind them can also reduce misunderstandings.

Ignoring Tax Implications

Generous gifts can sometimes lead to unintended tax consequences. In 2025, the IRS allows individuals to gift up to $19,000 annually per recipient without triggering gift tax reporting requirements. Exceeding this threshold may require filing a gift tax return or result in tax liabilities. Grandparents should understand these limits and plan their giving accordingly. Contributions to 529 college savings plans or medical expenses paid directly to providers are additional tax-efficient options.

Failing to Prioritize Estate Planning

Large gifts made without considering overall estate planning goals can disrupt long-term plans or unintentionally disinherit certain heirs. Without proper documentation, disputes can arise among family members. Grandparents should incorporate financial gifts into their broader estate plans. Working with an estate planning attorney ensures that gifts align with their goals and minimize potential conflicts.

Best Practices for Supporting Grandchildren

To avoid financial missteps, grandparents can adopt these thoughtful strategies:

  • Set clear boundaries and determine how much you can give without compromising your financial security.
  • Plan equitable contributions to ensure fairness among grandchildren, while considering individual needs.
  • Focus on education by contributing to tax-advantaged accounts, like 529 plans.
  • Pay for specific expenses directly to avoid triggering gift tax complications.
  • Work with financial and legal professionals to develop a giving strategy that aligns with long-term goals.

The Importance of Communication

Open communication with family members is key to avoiding misunderstandings or conflicts. Discuss your intentions and limitations with both your children and grandchildren, ensuring that everyone understands your approach to financial support. These conversations can strengthen family bonds and provide clarity about your financial role.

Balancing Generosity with Stability

Supporting grandchildren financially can be one of the most fulfilling aspects of grandparenting. By avoiding common mistakes and implementing thoughtful strategies, grandparents can provide meaningful assistance while safeguarding their financial future. A balanced approach ensures that your generosity strengthens family ties without creating financial or relational strain.

Key Takeaways

  • Avoid Overextending Finances: Determine how much you can give without risking your retirement savings or financial security.
  • Co-Signing Risks: Understand that co-signing loans carries financial and credit risks, and explore safer alternatives.
  • Plan Equitable Support: Strive for fairness when gifting to multiple grandchildren to prevent misunderstandings or conflicts.
  • Mind Tax Implications: Stay within annual gift tax limits or use tax-efficient methods like 529 contributions to minimize liabilities.
  • Integrate Gifts into Estate Plans: Ensure that financial gifts align with broader estate planning goals to reduce disputes.

Reference: AARP (Nov. 11, 2024) “The 5 Worst Mistakes Grandparents Can Make with Money”

Estate Planning Steps to Contemplate in 2025

One of the tasks for families and business owners to consider at the start of a new year is estate planning. Did any special events occur in 2024, making it necessary for your estate plan to be updated? Or has another year passed since you didn’t get to update an existing plan or even have an estate plan created? What about a succession plan? A recent article from Cincinnati Business Courier, “5 key considerations for personal estate planning in 2025: An attorney’s perspective,” examines steps to take in the new year.

What’s going to happen with the federal gift, estate and generation-skipping transfer tax exemptions? The exemption is currently $13.61 million and will increase to $13.99 million in January (indexed for inflation). The legislation creating these levels expires on January 1, 2026, but the future of the exemption remains uncertain. Many high-net-worth individuals and families are going forward with estate planning strategies to ensure that their estates are not hit with taxes in case the exemption is reduced.

Annual gift tax exclusion rises to $19,000 in 2025. The IRS recently announced an increase in the annual gift tax exclusion, which took place in January 2025, from $18,000 to $19,000. This is the amount any individual can gift to as many people as they wish without using up any of their lifetime exemptions. A married couple can make gifts of $38,000 to as many individuals as they want.

Grandparents who gift $38,000 to grandchildren and adult children can transfer a tidy sum to their descendants in a single year without using any of their own exemption amounts. Speak with your estate planning attorney about whether or not it makes sense to file a gift tax form with the IRS. There are instances where this is not required. However, it is helpful for future planning.

Deadline for the Corporate Transparency Act is approaching. Business owners should speak with their estate planning attorney about the Corporate Transparency Act to see if they need to file a beneficial owner information report. Any reporting company established before January 1, 2024, is required to file the initial beneficial owner information report before January 1, 2025. A reporting company created in 2024 has to file within 90 days of formation. Even single-member limited liability corporation (LLC) owners should check with their attorneys to ensure that they meet reporting obligations.

Family-owned and other closely held business organizations should consider the new year a time to start creating or updating a succession plan. The succession plan needs to align with the estate plan and serve two goals: avoiding probate and ensuring a seamless transition for employees and clients.

Will the recent Connelly decision impact your business succession plan? This high court decision centered on whether or not proceeds from a business owner’s life insurance should be included in the value of the business for estate tax purposes. The court ruled a company’s obligation to redeem a deceased shareholder under a stock redemption plan cannot be used to offset the insurance proceeds when calculating the value of the company as part of the owner’s estate. Business owners need to consider how their succession plan is structured, including life insurance, and discuss whether changes need to be made.

Reference: Cincinnati Business Courier (Dec. 3, 2024) “5 key considerations for personal estate planning in 2025: An attorney’s perspective”

Can You Gift Money from a Retirement Account?

When preparing an estate plan, it’s easy to neglect charitable giving, especially if your main focus is to get the plan done most efficiently and move on to the next task on your list—like spring cleaning or gardening. However, a recent article from the Tri-Cities Area Journal of Business recommends a way to take care of charitable giving as part of your estate plan that won’t be overly burdensome: “Use retirement accounts to give to charity in your estate plan.”

An estate comprises different assets, which all have different characteristics. Some assets are distributed by a will, and others by the beneficiary designation on the account. Some are subject to income taxes for heirs, and others are not taxable. This info needs to be considered when preparing an estate plan.

If you choose to give pre-tax retirement accounts, those funds are typically subject to income tax when beneficiaries withdraw money from them. A pre-tax retirement account may be more expensive for heirs, especially if they are in a high-income tax bracket. The inheritance could also push them into a higher tax bracket.

Nonprofits are not subject to income tax and are grateful to receive pre-tax retirement assets.

Your estate plan consists of a last will and testament, powers of attorney and health care directives. Your estate includes different types of assets, and you’ll need to consider their value in light of their tax liabilities when creating an estate plan.

Beneficiary designations are usually used with life insurance policies and retirement accounts. They can be changed whenever you want, and you can name whoever you want to receive the accounts, except pensions governed by federal law. Those must go to your spouse and follow the rules of the pension custodian.

To understand this concept, let’s say a married couple has two children and a net worth of $one million, which includes a $500,000 house, $100,000 in the bank and $400,000 in their retirement accounts. If they want 10% of their estate to go to a charity and the rest to their children, they could do the following:

  • Write the amount or percent of the donation into their will and direct their executor to ensure funds are donated from their probate estate, or
  • They can use the beneficiary designation on their retirement account to give a certain percentage to their children and charity.

The charity will receive $100,000 from the pre-tax assets, thereby preserving more nontaxable assets for their children. As assets change over time, they may need to change the percentage of the assets given through the retirement accounts. Assuming high marginal tax rates, by giving from their retirement accounts, their heirs will net a higher amount than if other assets were used to make the gift to the charity.

If your estate plan hasn’t included charitable giving, and this is an important part of your legacy, consult with an estate planning attorney to learn how to structure your estate plan and beneficiary designations to work together to achieve your goals.

Reference: Tri-Cities Area Journal of Business (April 15, 2024) “Use retirement accounts to give to charity in your estate plan”

Do I Pay Taxes on Wedding Gifts?

A generous gift for a child’s wedding doesn’t necessarily cause a tax problem unless your lifetime gifts are over the lifetime exclusion limit, which is extremely high right now. A recent article from Yahoo! Finance, “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?” says most Americans won’t have to worry about the gift tax.

In 2024, the lifetime exclusion is $13.61 million per person and $27.22 million for a married couple. Unless you’ve gone above and beyond these limits, you can make as many gifts as you like to anyone you choose without worrying or paying the 18% to 40% federal gift tax.

But there’s one thing to remember: if you make a gift over the annual gift limit, which is $18,000 per person in 2024 or $36,000 for a married couple, you need to send the IRS Form 709. The form should be submitted even if no gift taxes are due. It’s a simple and smart move.

How do gift taxes work? The federal gift tax doesn’t come into play often. Most gifts are tax-free simply because of the size of both the annual and lifetime gift exclusions. You can gift freely if you keep the limit in mind.

The lifetime exclusion for gift and estate taxes is so high right now that few Americans need to worry about it. If you are generously minded, you may gift $13.61 million (individual) and $27.22 million (married couple). The lifetime exclusion is just as it sounds: the number of gifts you may give during your life or as part of your federal estate.

If you are charitable-minded, you may make many contributions. There are no gift taxes levied on charitable donations, gifts to spouses or dependents, or gifts to political parties. As long as you pay directly to the institutions, there are no taxes on college tuition or healthcare expenses.

If you have a wedding coming up and are concerned about gift taxes, you can pay the vendors directly rather than giving money directly to the happy couple.

There are some strategies to manage the gift tax. One would be to split your $60,000 gift between your daughter and her fiancé. Both gifts would be under the 2024 $36,000 per person exclusion, assuming you are married, so there would not be a gift tax.

Another tactic is to spread the gift out over a few years. Let’s say you’re a single parent. You could gift your daughter and her fiancé $15,000 each this year and next, keeping you below the $18,000 annual gift tax exclusion.

If you’ve already given a gift of $60,000 to your daughter and made gifts over and above the $13.61 million lifetime exclusion, speak with your estate planning attorney to determine where you fall in the gift tax brackets and how much you’ll need to pay.

The easiest way to avoid gift taxes is to pay the vendors directly, but this depends on your overall situation. For instance, where is the money coming from—tax-deferred accounts or investment accounts? It would be wise to talk with your estate planning attorney before making a large gift.

Reference: Yahoo! Finance (March 14, 2024) “Do I Need to Worry About the Gift Tax If I Pay $60,000 Toward My Daughter’s Wedding?”

Understanding the 2024 Gift Tax Exclusions and Strategies for Wealth Transfer

Introduction

In the dynamic world of estate planning, understanding the intricacies of gift tax is crucial. This year brings significant changes to the federal gift and generation-skipping transfer (GST) tax exclusions, presenting unique opportunities for wealth transfer. For a detailed insight into these changes, McDermott Will & Emery’s article offers a comprehensive view.

2024 Gift and GST Tax Exclusions

The year 2024 marks a notable increase in the federal gift and GST tax exclusions. These heightened levels are a boon for estate planning but bear in mind this increase is temporary. Post-2025, these exclusions are set to revert to pre-2018 levels. This window presents a pivotal moment for individuals to maximize their wealth transfer under favorable conditions.

State-Specific Considerations

It’s important to remember that state-specific tax implications can vary. For instance, New York, New Jersey, and Connecticut residents face different considerations than residents of other states. This highlights the necessity for estate planning that is not only informed by federal law but also by the nuances of state-specific regulations.

Estate Planning Strategies

Several strategies can be employed to take advantage of the current gift tax landscape:

Dynasty Trusts

Dynasty trusts allow for the transfer of wealth across multiple generations, minimizing estate taxes over time.

Spousal Lifetime Access Trusts (SLATs)

SLATs enable one spouse to gift assets to a trust the other spouse can access, providing financial flexibility while benefiting from gift tax exclusions.

Grantor-Retained Annuity Trusts (GRATs)

GRATs are a way to transfer asset appreciation to beneficiaries without significant gift tax costs.

Intrafamily Loans and Sales to Grantor Trusts

These options offer more direct ways to transfer wealth within a family, with potential tax benefits under the current regulations.

Planning for Post-2025 Changes

With the anticipated reversion of tax exclusions post-2025, planning is imperative. Maximizing wealth transfer before these changes take effect can lead to significant long-term tax savings.

The current landscape of gift tax exclusions offers a window of opportunity for strategic estate planning. However, this window is not open indefinitely. Proactive planning, tailored to both federal and state-specific laws, is key to maximizing wealth transfer under these favorable conditions. Consulting with estate planning professionals is highly recommended to navigate this complex area effectively.

For more detailed information, refer to the original McDermott Will & Emery article here.

The Pitfalls of Adding a Child to Your Home’s Deed

As an estate planning attorney, I’ve witnessed many parents consider adding a child to the deed of their home with good intentions. They often view this as a simple strategy to ensure that their property seamlessly passes to their children without the complexities of probate. However, this well-intentioned move can lead to numerous unexpected complications and financial burdens. This article explains why adding a child to your home’s deed might not be the optimal choice for your estate plan.

Understanding the Basics: What Does Adding a Child to a Deed Mean?

To begin, let’s clarify what it means to add a child to the deed of your home. By doing this, you are legally transferring partial ownership rights to your child. This action is commonly perceived as a method to circumvent probate. However, it is imperative to understand that it also entails relinquishing a degree of control over your asset.

Legal Implications of Co-Ownership

When you add your child to the deed, you are not just avoiding probate; you are creating a co-ownership situation. This means your child gains legal rights over the property, equal to yours. Such a shift in ownership can have significant legal ramifications, particularly if you need to make decisions about the property in the future.

Probate: Is Avoiding It Worth the Risk?

Avoiding probate is often cited as the primary reason for adding a child to a home’s deed. Probate can be a lengthy and sometimes costly process. However, it’s essential to weigh these concerns against the potential risks and challenges of joint ownership.

The Complexity of Bypassing Probate

Probate avoidance, while seemingly beneficial, does not always equate to the most advantageous approach. The process of probate also serves to clear debts and distribute assets in a legally structured manner. By bypassing this process, you might be opening the door to more complicated legal and financial issues in the future.

Gift Tax Implications: A Costly Oversight

One of the most overlooked aspects of adding a child to your deed is the gift tax implications. The IRS views this act as a gift, and if the value of the property exceeds the annual exclusion limit, it could lead to a taxable event.

Understanding Gift Tax Rules

It’s important to understand that the IRS has established specific rules regarding gifts. If the value of your property interest exceeds the gift tax exclusion limit, you might be required to file a gift tax return. This could potentially lead to a significant tax liability, an aspect often not considered in the initial decision-making process.

Loss of Control: What Happens When You’re No Longer the Sole Owner?

The loss of control over your property is a critical consideration. Once your child becomes a co-owner, they have equal say in decisions regarding the property. This change can affect your ability to sell or refinance the property and can become particularly problematic if your child encounters financial issues.

Risks of Co-Ownership

In a co-ownership scenario, if your child faces legal or financial troubles, your property could be at risk. Creditors might target your home for your child’s debts, and in the case of a child’s divorce, the property might become part of a marital settlement.

Capital Gains Tax: A Long-Term Financial Burden

A significant financial consideration is the potential capital gains tax burden for your child. When a property is inherited, it usually benefits from a step-up in basis, which can significantly reduce capital gains tax when the property is eventually sold. However, this is not the case when a child is added to a deed.

Implications of Missing Step-Up in Basis

Without the step-up in basis, if your child sells the property, they may face a substantial capital gains tax based on the difference between the selling price and the original purchase price. This tax burden can be considerably higher than if they had inherited the property.

Family Dynamics and Legal Complications

Adding a child to your deed can inadvertently lead to family disputes and legal challenges, especially if you have more than one child. This act might be perceived as favoritism or create an imbalance in the distribution of your estate, leading to potential conflicts among siblings.

Navigating Family Relationships

It’s crucial to consider the dynamic of your family and how adding one child to the deed might affect relationships between siblings. Equal distribution of assets is often a key consideration in estate planning to maintain family harmony.

Alternatives to Adding a Child to Your Home’s Deed

There are several alternatives to adding a child to your home’s deed. Creating a living trust, for instance, allows you to maintain control over your property while also ensuring a smooth transition of assets to your beneficiaries.

Benefits of a Living Trust

A living trust provides the flexibility of controlling your assets while you’re alive and ensures they are distributed according to your wishes upon your death. This approach can also offer the benefit of avoiding probate without the downsides of directly adding a child to your deed.

Seeking Professional Advice: Why It’s Crucial

Given the complexities and potential pitfalls of adding a child to your home’s deed, seeking professional legal advice is essential. An experienced estate planning attorney can help navigate these complexities and tailor a plan that aligns with your specific needs and goals.

The Role of an Estate Planning Attorney

An estate planning attorney can provide invaluable guidance in understanding the nuances of property law, tax implications and family dynamics. They can help you explore all options and devise a strategy that best protects your interests and those of your family.

While adding a child to your home’s deed might seem straightforward to manage your estate, it’s fraught with potential problems and complications. It’s vital to consider all the implications and seek professional guidance to ensure your estate plan is effective, efficient and aligned with your long-term intentions.

Key Takeaways

  • Gift Tax Risks: Be aware of potential gift tax implications when adding a child to your deed.
  • Loss of Control: Understand that you will lose some control over your property.
  • Capital Gains Tax Issues: Consider the long-term capital gains tax burdens for your child.
  • Family Dynamics: Think about the impact on family relationships and potential legal disputes.
  • Better Alternatives: Explore other options like setting up a living trust.
  • Seek Competent Guidance: Consult with an estate planning attorney for personalized advice.

Will Proposed Tax Hikes Have an Impact on My Estate Planning?

President Biden’s tax proposals are at the center of what the White House estimates is a $3 trillion deficit-reduction plan. They will be immediately rejected by Congressional Republicans. However, the ideas set up Democrats’ approach to the debt-ceiling fight later this year, as Republicans are gearing up to ask for spending cuts.

A major change would almost double the rate of the capital-gains tax, and applying an additional surcharge to fund Medicare, which would mean taxes on investments could rise to almost 45%.

Bloomberg’s recent article entitled, “In Biden’s Tax-the-Rich Budget, Capital-Gains Rates Near 45%,” examines the details of the tax proposals in the budget request that the White House released recently.

Capital Gains. The budget proposal would jump the capital-gains rate to 39.6% from 20% for those earning at least $1 million to equalize the taxation of investment and wage income. President Biden also wants to up the 3.8% Obamacare tax to 5% for those earning at least $400,000 to support the Medicare Trust Fund. As a result, the richest would pay a 44.6% federal rate on investment income and other earnings. The plan also calls for taxing assets when an owner dies. This would end a tax benefit that let the unrealized appreciation go untaxed when transferred to an heir.

Corporate Taxes. Trump’s 2017 corporate tax cut would get significantly rolled back, bringing the top rate to 28% from 21%. The proposal also calls for increasing the taxes US companies owe on their foreign earnings to 21%, doubling the 10.5% included in Trump’s tax law.

Carried Interest. The carried-interest tax break used by private equity fund managers to lower their tax bills would be struck under the Biden plan. Under current law, investment fund managers can pay the 20% capital-gains rate on a portion of their incomes that would otherwise be subjected to the 37% top individual-income rate.

Rich Retirement Accounts. The plan would close a loophole that allows the wealthy to accumulate savings in tax-favored retirement accounts intended for middle earners. In addition, Biden would limit the amount taxpayers with incomes over $400,000 can hold in Roth individual retirement accounts.

Estate, Gift Taxes. Bolstering the tax rules on estate and gift taxes would make the system harder for the wealthy and trusts to avoid taxes.

Reference: Bloomberg (March 9, 2023) “In Biden’s Tax-the-Rich Budget, Capital-Gains Rates Near 45%”

Giving to My Favorite Charity in Estate Plan

If you’d like to leave some or all of your money to a charity, Go Banking Rates’ recent article entitled “How To Leave Your Inheritance to an Organization” provides what you need to know about charitable giving as part of your estate plan.

  1. Make Sure the Organization Accepts Donations. Unless you have a formal agreement with the charity stating they’ll accept the inheritance, the confirmation isn’t a binding commitment. As a result, you should ask the organization if there’s any form language that they may want you to add to your will or trust as part of a specific bequest. If the charity isn’t currently able to accept this kind of donation, look at what they will accept or if other charities with a similar mission will accept it.
  2. Set the Amount You Want the Charity To Receive. Some people want to leave the estate tax exemption — the maximum amount that can pass without tax — to individuals and leave the rest to charity. Because the estate tax exemption is subject to change and the value of your assets will change, the amount the charity will get will probably change from when the planning is completed.
  3. Have a Plan B in the Event that the Charity Doesn’t Exist After Your Death. Meet with your estate planning attorney and decide what happens to the bequest if the organization you’re donating to no longer exists. You may plan ahead to pass along the inheritance to another organization and make sure it receives the funds. You could also have the inheritance go back into the general distributions in your will.
  4. State How You Want Your Gift to Be Used. If there is a certain way that you’d like the charity to use the inheritance, you can certainly inquire with the organization and learn more. Find out if the charity accepts this type of restriction, how long it may last and what happens if the charity no longer uses it for this purpose.

As you draft charitable planning provisions, make sure you do so alongside an experienced estate planning attorney.

The provisions in your will should be specific about your desires and provide enough flexibility to your personal representative, executor, or trustee to be modified based on the conditions at the time of your death.

Reference: Go Banking Rates (August 26, 2022) “How To Leave Your Inheritance to an Organization”

There are Ways to Transfer Home to Your Children

Kiplinger’s recent article entitled “2 Clever Ways to Gift Your Home to Your Kids” explains that the most common way to transfer a property is for the children to inherit it when the parent passes away. An outright gift of the home to their child may mean higher property taxes in states that treat the gift as a sale. It’s also possible to finance the child’s purchase of the home or sell the property at a discount, known as a bargain sale.

These last two options might appear to be good solutions because many adult children struggle to buy a home at today’s soaring prices. However, crunch the numbers first.

If you sell your home to your child for less than what it’s worth, the IRS considers the difference between the fair market value and the sale price a gift. Therefor., if you sell a $1 million house to your child for $600,000, that $400,000 discount is deemed a gift. You won’t owe federal gift tax on the $400,000 unless your total lifetime gifts exceed the federal estate and gift tax exemption of $12.06 million in 2022, However, you must still file a federal gift tax return on IRS Form 709.

Using the same example, let’s look at the federal income tax consequences. If the parents are married, bought the home years ago and have a $200,000 tax basis in it, when they sell the house at a bargain price to the child, the tax basis gets split proportionately. Here, 40% of the basis ($80,000) is allocated to the gift and 60% ($120,000) to the sale. To determine the gain or loss from the sale, the sale-allocated tax basis is subtracted from the sale proceeds.

In our illustration, the parent’s $480,000 gain ($600,000 minus $120,000) is non-taxable because of the home sale exclusion. Homeowners who owned and used their principal residence for at least two of the five years before the sale can exclude up to $250,000 of the gain ($500,000 if married) from their income.

The child isn’t taxed on the gift portion. However, unlike inherited property, gifted property doesn’t get a stepped-up tax basis. In a bargain sale, the child gets a lower tax basis in the home, in this case $680,000 ($600,000 plus $80,000). If the child were to buy the home at its full $1 million value, the child’s tax basis would be $1 million.

Another option is to combine your bargain sale with a loan to your child, by issuing an installment note for the sale portion. This helps a child who can’t otherwise get third-party financing and allows the parents to charge lower interest rates than a lender, while generating some monthly income.

Be sure that the note is written, signed by the parents and child, includes the amounts and dates of monthly payments along with a maturity date and charges an interest rate that equals or exceeds the IRS’s set interest rate for the month in which the loan is made. Go through the legal steps of securing the note with the home, so your child can deduct interest payments made to you on Schedule A of Form 1040. You’ll have to pay tax on the interest income you receive from your child.

You can also make annual gifts by taking advantage of your annual $16,000 per person gift tax exclusion. If you do this, keep the gifts to your child separate from the note payments you get. With the annual per-person limit, you won’t have to file a gift tax return for these gifts.

Reference: Kiplinger (Dec. 23, 2021) “2 Clever Ways to Gift Your Home to Your Kids”

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