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How Family Loans Can Provide Estate Planning Benefits

How Family Loans Can Provide Estate Planning Benefits

A lingering effect of the economic recession of recent years is the difficulty individuals still have in obtaining loans, especially if those seeking a loan are young. Parents or grandparents of young borrowers can offer a low interest rate intra-family loan and still reap some estate planning benefits if they take advantage of the following strategies:

Charge the minimum interest rate. The IRS sets a minimum interest rate every month for intra-family loans, which can vary according to the terms of the loan. For September, the rates are:

  • 0.36% for loans of less than three years
  • 1.86% for loans of 3-9 years
  • 2.97% for loans of 9+ years

You must charge at least the minimum to avoid having the IRS categorize the loan as a gift or face taxable interest income that is equal to the difference between the established minimum and the lower rate actually charged.

Move assets out of an estate. Wealthy parents can move assets out of their estate with an intra-family loan for an investment. Any appreciation on the investment over the minimum interest rate can then accumulate in the borrower's estate rather than the parents' estate.

Transfer interest to a FLP. Lenders can sell a partnership interest in a Family Limited Partnership (FLP) in exchange for a promissory note; any unpaid balance on the note would be all that remains in the lender's estate and keeps the value of the transferred asset at fair market value on the date of transfer.

Tax deductible interest for borrower. If a borrower is using the loan to purchase a house, the loan should be recorded as a lien against the property, and the borrower can deduct the interest paid just like a traditional mortgage.

Document the loan. Be sure you complete all the paperwork necessary to ensure the IRS classifies the loan as a loan and not a gift. And don't forgive the loan or it will probably be considered a gift. In most instances, interest paid back to the lender is taxable income, unless the loan is less than $10,000 and was not used to purchase an income-producing asset.

Contact our Fort Myers law firm for a free consultation to create or review an estate plan to help you secure a better financial future.

Categories: Estate Planning, Asset Protection
dorcey law firm
The Dorcey Law Firm, PLC - Fort Myers Attorney
Located at 10181 Six Mile Cypress Pkwy, Suite C, Fort Myers, FL 33966
Phone: (239) 330-6674
Local Phone: (239) 418-0169