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Low Rates Make Intra-Family Loans Attractive

Dear Advisor:

Ive got a great business opportunity but it requires a substantial investment. Venture capital has dried up and banks arent interested in loaning the money. If I go to my parents, theyll be concerned about estate and gift tax issues. What are appropriate terms and conditions?


When a family member needs money, he or she is most likely to turn to another family member. But intra-family loans can cause problems with the taxman or within the family.

The IRS gets interested in intra-family banking when loans look like efforts to avoid gift taxes. In the U. S., annual gifts of $11,000 per individual are exempt from gift taxes. If funds are provided to family members in greater amounts, the imputed interest on the loan can be gifted. As long as the loan is paid back in a year or less, you can lend as much as you want without interest. With interest rates so low, significant amounts can be loaned without charge or tax consequences. At last November’s rates, for example, a husband and wife could loan their son or daughter $1,000,000 for three years with an imputed annual interest of $18,200 – well within the $22,000 annual gift exclusion.

The IRS calculates allowable interest rates monthly but the rate is fixed at level of the month in which the loan is made. For loans less than three years, the rate dropped from 3.21% in May to 1.82% in November, the lowest level since Congress passed the 1988 law governing such rates.

Documenting the loan is also a good idea, specifying the amount, interest rate, length of the loan, and repayment schedule. For documentation of substantial loans, you should work with your attorney. Everything should be as clear as possible.

And by the way, have a plan to pay your parents back – and do it.




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