Colleagues, Can’t get it - CFA readings say that high earning assets should be always placed to youngest generations. However, if an oldest generations already possess similar assets, how this transfer can be made through a loan? Schweser adds the confusion saying that “older generation may loan assets”. I can understand guarantee, but it looks like a leveraging in the whole family context at least until the donor’s death. Many thx for the explanation
I’m not that familiar with US tax law, but I think it works like this: Old rich Daddy loans $$ to spoiled Kid at lowest interest rate possible. Pays tax on interest from Kid. Spoiled kid invests the money in the “high earning asset” and pockets the difference, but doesn’t pay tax on unrealized capital gains until much much later, since dear old Dad will have to pay up when he dies. Kid may even have a tax deduction for the interest paid on the loan. Family as a whole wins since the interest is a wash, investment earnings is a wash. IRS is the only one who loses.
But what if old Daddy does not have free cash and have only high earning assets? How can the family get estate/gift tax advantage in that case using a loan? If he provides a guarantee for the kid it will increase the leverage for the family …
that’s a good point, and I hadn’t even thought of that…
So can anyone help me to get it? Does anyone understand it at all?