An estate planning technique that is often overlooked but can be a very effective way to accomplish family goals is that of an intra-family loan. Keep in mind a loan and a gift are two very different things and fall under very different rules of law.
Think of loans as a way to create intra-family liquidity so that wealthier family members can help others without being subject to traditional debt. You will still need to charge interest at the federally mandated rate, known as the Applicable Federal Rate (AFR). These rates are published monthly on the IRS website. For example, in August 2018, the AFR varies between 2.42%-2.95% depending on the term of the loan. This is still well below bank loan rates and can help a family afford a home, car, or business investment.
These loans can allow for a significant investment, the appreciation of which need only be greater than the interest rate, and this appreciation will pass to the loved one who accepted the loan. This also helps to lessen the estate of the lender-family member which can be an estate planning benefit.
Remember to treat the loan as a loan, otherwise it is a gift. Repayment according to terms must be enforced. Forgiveness in whole or part of the loan will be treated as a gift and may subject the lender to gift tax.
Make sure you have documentation of the terms of the loan. Keep track of repayments and balance owed. Cherish the opportunity an intra-family loan can provide. For assistance with intra-family loans, please contact an experienced estate planning attorney such as Stouffer Legal at 443-470-3599 in the Greater Baltimore area.
