Intrafamily Lending

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In recent months, investors have faced market volatility, depressed asset values, and rising interest rates. While unpleasant, these market conditions may present unique opportunities in the wealth planning arena. An intrafamily loan can be a useful tool for individuals who want to help a family member start a business or purchase a home without making an outright gift. This multipurpose strategy can even be used as part of a wealth transfer plan in conjunction with a trust.


An intrafamily loan can be an effective tool to allow individuals to loan money to family members at a comparatively low rate without the loan being considered a gift. Highly attractive in a low interest rate environment, intrafamily loans may be especially timely given the potential for additional rate increases implemented by the Fed in the upcoming months.



Intrafamily loans often offer greater flexibility in contrast with their commercial counterparts. While the individual’s ability to repay the loan is important to ensure the loan is not deemed to be a gift by the IRS, the borrower does not need to have a perfect credit history or significant collateral. The loan can also be designed so the borrower has no limitations on how they may use the funds.

Loan repayment can be structured in virtually any way the lender chooses. An interest-only loan is an example of a repayment option that allows the borrower to pay interest annually and make a balloon payment at the end of the payment term. This may be especially attractive for those who would like to help their child start a business, but also allow the child adequate time to pay the loan off when the business is producing cashflow.

The lender has the ability to forgive all or part of the loan at any time. An important caveat of forgiving an intrafamily loan is that the forgone interest must be recognized as income by the lender. Notably, the loan must be structured so there could be no conclusion made by the IRS that the lender’s original intent was to forgive the borrower’s principal or interest payments. Among other considerations, the loan should be enforceable by the lender and loan forgiveness should be in their sole discretion.

Favorable Interest Rate

An intrafamily loan must charge a minimum interest rate in order to avoid being considered a gift for tax purposes. The interest rate must be greater than the Applicable Federal Rate, known as the AFR. The AFR, published monthly by the IRS, is the minimum interest rate allowed for private loans. The AFR rates include short-term (3 years or less), mid-term (3-9 year maturity), and long-term (9 years or longer). If the interest rate charged on an intrafamily loan is less than the AFR, the IRS can reclassify the loan as a gift and tax it as such. The AFR reached historic lows in recent years but has increased incrementally. It may be worthwhile for investors to consider the intrafamily loan strategy before further increase in the AFR.


An intrafamily loan can be a useful estate planning tool. Rather than lending to a family member, one can instead loan funds to a trust. The same considerations for loan documentation and established repayment terms apply. In this method, a trust, commonly an Intentionally Defective Grantor Trust (IDGT), would first be funded with collateral. The loan would then be made to the trust in exchange for a promissory note. The assets would grow within the trust for the duration of the term and ultimately repay the loan. The remaining assets in the trust are shielded from estate tax and will pass according to the terms of the trust to the beneficiaries. An intrafamily loan to a trust may be a compelling wealth transfer strategy to reduce estate taxation while efficiently transferring assets to the next generation.


While intrafamily loans carry many potential benefits, they must be structured carefully with the input of a tax or legal professional. Repayment documentation and establishment of a promissory note are among several critical steps to ensure the loan will not be reclassified as a taxable gift by the IRS. Should the lender choose to forgive all or part of the loan, the forgone interest will be taxable to them. Similarly, interest payments to the lender during the life of the loan will be considered taxable income.

Family dynamics must also be carefully considered. Intrafamily loans can be especially precarious in situations where the lender is dependent on the income stream from the loan payments if the borrower defaults on the loan. The cashflow needs of the lender and the likelihood of repayment must be taken into consideration. Of additional note is the potential for conflict within the family. A parent making an intrafamily loan to one child whose siblings may not need a loan or who have intentionally spent more conservatively can eventually lead to resentment towards the sibling or parents.


Intrafamily loans have multiple purposes and can enable individuals to help family members accomplish goals which might otherwise prove difficult. The potential estate planning benefits can be highly appealing from a wealth transfer and tax mitigation standpoint. An improperly implemented intrafamily loan carries significant potential for adverse tax consequences. Careful tax planning must be done when executing this useful but complex strategy.



About the Author

Lindsay Wilcox specializes in implementing individualized planning strategies in the areas of estate planning, cash flow management, charitable giving, risk management, and taxation. She enjoys building long-term relationships with clients through wealth planning.

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