Intra-Family Loans: Transferring Non-Taxable Wealth Between Generations
Author: Stacy Hanley
Transferring large amounts of wealth to your heirs through your estate is not as simple as handing them a piggy bank. There are many factors at play that you should consider, one of which being whether the money is taxable or not.
When you loan a sum of money greater than $10,000 to your child or grandchild within your estate plan, you must charge some amount of interest on the loan, or else the Internal Revenue Service (IRS) will treat the foregone interest as a taxable gift.
That being said, there is a way to do so at lower rates than those charged by commercial lenders.
What is an Intra-Family Loan?
In order to prevent the IRS from treating your loan as a taxable gift, you (the lender) must charge a specified minimum interest rate, which is known as the applicable federal rate (“AFR”). This rate is determined by the Treasury every month based on the term of the loan and the compounding period.
For example, in October 2020, the AFR stood as:
- Short-Term Loans (0–3 years): 0.14%
- Mid-Term Loans (3–9 years): 0.38%
- Long-Term Loans (greater than 9 years): 1.12%
Loans using these rates to pass wealth to another family member (again, usually a child or grandchild) are called intra-family loans. They are used when the “borrower” can earn a greater return on the amount borrowed than on the interest accrued from the AFR. This way, he or she can keep the return without having any gift or generation-skipping transfer (“GST”) tax consequences.
Should I Make an Intra-Family Loan?
Especially with the uncertainty of the COVID-19 pandemic and the general upheaval of 2020, intra-family loans have become a much more suitable option than commercial loans (even with those rates being as low as they are today) because the interest expenses can be paid directly to a family member during the loan term. Not only that, but we’ve seen this become a very popular estate planning tool for transferring wealth to heirs due to its low cost and non-taxable benefits.
Given how low minimum interest rates are today, the appeal of these loans has never been greater.
To learn more about intra-family loans and how they can benefit you going into 2021, contact our firm today!
Estate Planning with Lefkoff-Duncan
When it comes to estate planning, sooner is always better than later, and Lefkoff-Duncan is here to help. Our experienced team will assist you in all of your estate planning endeavors so that you’ll never again need to wonder if you’ve done enough to take care of the ones you love.