At Hays Firm, many of our Estate Planning clients are seeking methods to help their children or other family members become financially stable. For instance, some parents would like to help their children purchase a home, pay off debt, or invest in a new business venture. However, a transfer of wealth may mean tax consequences for both the parent and then child. A popular tool to minimize the tax implications, is to provide money to your loved one with an “intra-family loan.”
An intra-family loan is a loan that is documented with a fully enforceable contract or promissory note. Intra-family loans must have the minimum interest rate that is imposed by the IRS. The minimum interest rates can be found on the IRS website. These minimum interest rates are typically lower than those offered by commercial lenders.
The payment structure of an intra-family loan may be more flexible than those offered by commercial lenders. The loan payments from the child to the parent may be structured to fit the child’s specific needs. For example, if the child will not be able to make monthly payments, the intra-family loan can be structured for payments on a bi-monthly or semi-annual basis. Or, you may structure the loan in such a manner that the borrower only makes payments on the interest and then re-pays the entire principal when the term of the loan expires.
Unlike many commercial loans, the borrower may use the principal for his or her own purposes. There are no limitations placed on how the borrower uses the money. Therefore, this is a great tool for parents to help children pay down debt, finance a car, purchase a home, or start a new business.
Keep in mind that the intra-family loan must be repaid eventually, either during the lender’s lifetime or after his or her death. As a result, it is important to fully discuss and determine the terms of the loan and how the loan will be repaid. Additionally, it is very important that loan is documented with a written promissory note. The lender must also keep track of payments made pursuant to the promissory note. If these formalities are not observed, the IRS may determine that the intra-family loan is a gift and there will be tax implications on this gift.
The attorneys at Hays Firm are familiar with advising clients on the applicability of intra-family loans. We encourage you to reach out to one of our attorneys to discuss your family’s financial goals. Our attorneys can help you determine a payment structure that best fits your family’s situation and circumstances. Additionally, we are able to draft a promissory note that comports with the IRS regulations and with the tax code.
Please contact us for a free one-hour consultation if you would like to learn more about intra-family loans.