Intra-Family Loans


By: Todd Hall


In a low-interest rate environment, loans to children or grandchildren (intra-family loans) can be an effective way of assisting family members while keeping wealth within the family. Such loans can be for many purposes, such as assisting with the purchase of a home or car, paying off higher interest debt, or starting a business. There are several uses of intra-family loans in more complex wealth transfer plans as well. A properly structured intra-family loan has many benefits, including:

  • lower interest rates for the borrower compared to commercial loans
  • greater flexibility than commercial loans (e.g. any number of years)
  • loans can be made with no credit checks or reporting if desired
  • origination and other transaction fees can be avoided

Interest Rates Used

There is a minimum interest rate that must be charged on intra-family loans in order to avoid adverse tax consequences. The rate that must be charged is called the Applicable Federal Rate (AFR) and is published monthly by the IRS. The rate is based on the term of the loan as follows:

  • Short-term — Three years or less
  • Mid-term — More than three years and up to nine years
  • Long-term — More than nine years

As of August 2020 the AFRs are: 0.17% for short term, 0.41% for mid-term, and 1.12% for long term loans. This means a parent can create a 30-year loan to a child for 1.12%, while commercially available mortgages are around 3%.

Properly Implementing Intra-Family Loans

The IRS presumes a transfer of money to a family member is a gift unless it is properly structured as a bona fide loan. Before implementing an intra-family loan, consult with qualified tax and legal advisors to confirm it is set up properly and will be honored by the IRS. Best practices include:

  • Sign a promissory note
  • Establish a fixed repayment schedule and ensure payments are made
  • Set a rate at or above the AFR in effect when the loan originates
  • Secure or collateralize the debt
  • Maintain records that reflect a true loan transaction
  • Avoid having a prearranged schedule to forgive the loan
  • Lender should report interest income, and if applicable the borrower may deduct interest payments (e.g. for a properly secured mortgage up to a loan size of $750,000)

If properly structured and maintained, intra-family loans are a technique that can have significant benefits for both the borrower and the lender.

Homrich Berg is a national independent wealth management firm that provides fiduciary, fee-only investment management and financial planning services, serving as the leader of the financial team for our clients.