Intra-Family Loans and Estate Planning: As we plan our lives, parents and family can be the most important source of intra-family loans, estate planning, and emotional resource we have during our entire life, more so than our estate. By providing love and support to our family members, we help to reinforce the strength of that net. In some circumstances, that support comes in the form of giving a financial boost to our family members in need. When deciding how and when to provide loans to your family member, you need to make sure you keep your estate plan in mind, as the two issues are closely linked.
Loans to family can have serious tax ramifications on discharge. If you decide to make a substantial loan to your family member, but decline to charge any interest, the Internal Revenue Service will likely interpret this loan as a gift. This has tax consequences for both parties. In order to make sure that the IRS does not treat a loan as a gift, you need to charge at least the applicable federal interest rate for the loan. As a result, it is an important step for estate planning to make sure you have a signed loan agreement with your family member clearly stating out the terms of the loan and the interest you are charging.
Despite the fact that there can be taxes associated with intra-family loans, this can also be a good way to help build a family’s overall wealth. Where there are conflicts of interest, a trustee can be removed and replaced to implement the proper plan. If the recipient of the loan is able to make more money by investing the money from the loan than is charged through interest, that recipient will not owe gift taxes on the excess. For example, if parents lend a million dollars to their child, charging the mid-term AFR rate of 2.72%, the child will owe $1,272,000 back to the parents at the end of the loan. If the child can invest the funds from the loan and generate more than $1,272,000, the child can retain the overage without owing gift taxes on that amount. In this way, family members can use intra-family loans to shift wealth and help build the family’s overall net worth.
Where trustees may have trouble and make mistakes, is where a trustee without authorization loans money to himself against the terms of the trust and against fiduciary duties. Always consult counsel on loans.
Our counsel have extensive experience in family loans in Los Angeles, helping our clients understand estate planning and how to achieve their goals for their family. Call us today at 818.340.4479 for a consultation about Intra-Family Loans and Estate Planning.
