fbpx
Schedule Your Appointment - Fill Out the Form Below
Skip to content
The Law Office of Antoinette Bone, PLLC
  • Home
  • Practice Areas
    • Estate Planning
      • Estate Planning FAQs
      • Asset Protection
      • Ethical Wills
      • Special Needs Trusts
      • Special Needs Resources
    • Probate
    • Guardianship
  • Our Firm
    • Attorney
    • Speaking Opportunities
    • Firm Overview
  • Getting Started
  • Videos
  • Resources
    • Blog
    • Gallery
  • Contact
  • Careers
817-462-5454
How to Use Intrafamily Loans as Part of Your Estate Plan

How to Use Intrafamily Loans as Part of Your Estate Plan

Posted on October 25, 2021 | by abone

When interest rates are low, intrafamily loans can be a good way to assist a relative (typically a child) with purchasing a house or a family business, and in certain circumstances they can be used to gift money to the next generation.

An intrafamily loan allows family members to borrow money from each other at a special rate, but it must be structured properly so that the loan is not considered a gift. This means the loan must have a written promissory note, require repayment, and charge interest (if the loan is for more than $10,000). The IRS sets the Applicable Federal Rate (AFR) each month, and the interest on the intrafamily loan must equal the AFR. The rate is different, depending on the term of the loan, which can be a short-term loan (0-3 years), a mid-term loan (3-9 years), or a long-term loan (9 or more years). The AFR is typically lower than the interest rate a bank would charge, and the borrower’s credit doesn’t affect the loan, so someone with bad credit can still get a loan.

When structured properly, intrafamily loans can assist children with purchases and pass on assets. The following are some of the ways intrafamily loans can be used:

  • Pay for a house. An intrafamily loan can be used to fund a mortgage for children or grandchildren. Because the interest rates are lower, the children will pay less overall than going through a traditional mortgage lender.
  • Pass on a family business. Depending on how large the business is, giving away a business could exceed the prevailing gift tax exemption. Instead, parents can loan money to a child to purchase the family business. Parents who are financially able could use the annual gift limit ($15,000 in 2021) to give children money to repay the loan. Alternatively, if the family business produces income, the child can use the income to pay back the loan. Even if the business doesn’t exceed the gift tax exemption, this can be a good strategy for parents who want to pass on the business, but still need a steady income stream.
  • Pass on assets. Intrafamily loans can be used as a method of passing on assets provided the borrower can invest the money in a way that brings in a higher rate of return than the interest rate on the loan. Given the low interest rate on intrafamily loans, this can be a successful strategy. If the loan is a large one, it may be wise to loan the money to a family trust. The trust invests the money and repays the loan. After the loan is repaid, the remaining assets are protected by the trust and can be distributed to beneficiaries as dictated by the trust terms.

The downside of an intrafamily loan is the same as with any loan: The loan must be repaid. If the child defaults on the loan, it could trigger a gift tax for the person making the loan. It is also important to have the correct paperwork and documentation. Intrafamily loans should only be set up in consultation with your attorney.

You can schedule an appointment with the Law Office of Antoinette Bone in our Euless, Texas office by clicking the button below, or by calling us at (817) 462-5454.

To comply with the U.S. Treasury regulations, we must inform you that (i) any U.S. federal tax advice contained in this newsletter was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding U.S. federal tax penalties that may be imposed on such person and (ii) each taxpayer should seek advice from their tax advisor based on the taxpayer’s particular circumstances.

Nothing in this message is intended to provide legal advice.  This message is for educational purposes only.

Posted in Blog, Estate Planning

Post navigation

Make Sure Your Estate Plan and Other Essential Documents Are Safe from Disasters
Social Security Shortfalls Are Predicted to Begin a Year Earlier Due to the Pandemic

Categories

Archives

  Thank you for Signing Up

Join Our Newsletter

Please complete this form to create an account, receive email updates and much more.
  Please correct the marked field(s) below.
Contact Email  *
1,true,6,Contact Email,2
First Name 
1,false,1,First Name,2
Last Name 
1,false,1,Last Name,2
*Required Fields

Get In Touch

We believe that your call should be returned within 24 hours.


800 N. Industrial Blvd., Suite 106
Euless, TX 76039

Phone: 682.428.3046
Email: info@abonelaw.com
Driving Directions:

While my address is Industrial Blvd, we are actually on Clinic Drive. Look for the tall red Super Value Pharmacy sign. Whether coming from the North or the South, you will turn off of Industrial Blvd. onto Clinic Dr. Our building is located up the hill just past the Super Value Pharmacy at the far end of the building.

Office Hours

Mon-Thurs8:30am-5:00pm
FriBy Appointment Only
Sat/SunClosed
Leave A Review
© 2023 The Law Office of Antoinette Bone, PLLC | A Website Design by Ahrens Technologies

DISCLAIMER: Material presented on The Law Offices of Antoinette Bone, PLLC website is intended for information purposes only. It is not intended as professsional advice and should not be construed as such. If you communicate with us through this site or otherwise in connection with a matter for which we do not already represent you, your communication may not be treated as privileged or confidential and does not create an attorney-client relationship between you and the firm. If you communicate with us by e-mail in connection with a matter for which we already represent you, please remember that Internet e-mail is not secure and you should avoid sending sensitive or confidential Internet e-mail messages unless they are adequately encrypted.