• Ryan M. Vogel, CFP®

Intra-Family Loans and Other Advantages of Keeping Money in the Family

Updated: Jun 13


Key Takeaways

  • In today’s low-interest rate environment, think about being a lender, not just an investor.

  • Intra-family loans can be a great way to help your children or grandchildren financially, while avoiding gift tax and earning some interest income.

  • Always be sure to document loans between family members carefully.

This is the time of year when clients come to us looking for smart ways to transfer their wealth in a tax-efficient manner. One underused strategy is an intra-family loan. This is a legally documented loan between you and a family member – typically a child or grandchildren – to help them with a house down-payment, a wedding, business startup capital, paying off student debt or some other life milestone.

While some families are reluctant to formalize loans made to relatives, we’ve found that dotting the I’s and crossing the T’s when lending money to relatives will preserve family harmony more than rankle it. And it won’t jeopardize your lifetime gift exclusion amount (currently $11.7 million) either.


Do you know your AFR?

Since prevailing interest rates are so low, intra-family loans are a great way to transfer wealth without triggering gift taxes. They’re typically set using something called the Applicable Federal Rate (AFR) as a guideline. The AFR is the minimum interest rate that the IRS will allow for private loans without considering that money transfer a gift. The AFR is significantly lower than prevailing rates for mortgages, car loans, business loans or student loans. For instance, as of December 2021:

  • For short term loans (less than three years), the AFR today is only 0.33%.

  • For medium term loans (three to nine years), the AFR is only 1.26%.

  • For longer term loans (over nine years), the AFR is only 1.90%.

You’re free to loan money at rates higher than the AFR, but it is usually not advisable to set the interest rate below it. In either case, make sure you have a promissory note in place before making a significant loan to a family member. The note will confirm that the borrower is responsible for paying the loan back in full, since it’s not a gift. The note will also set the conditions of the loan (such as the term and the rate).

We strongly recommend having an attorney draft the proper terms so it’s enforceable. Again, the structure of the promissory loan is important to ensure that your loan isn’t misinterpreted as a gift. You want it to be clear to family members (and the IRS) that the loan is enforceable and will be paid back in full (with interest) on the timetable outlined in the promissory note.

In the event of an audit, the promissory note will make it easier to prove that you loaned the money to a family member. The loan will be considered an “arm’s length” transaction, and not a gift. The other reason you don’t want an intra-family loan construed as a gift is because if it’s considered a gift you will have to file a gift tax return and the money you “loaned” to a family member will count against your lifetime gift exclusion amount. A promissory note also protects you if the family relationship goes south—the borrower is still legally obligated to repay you.

Conclusion There are several other fun ways intra-family loans can be used to transfer wealth strategically to future generations of your family. If you are looking for a professional advisor to help construct a plan for you, don’t hesitate to reach out. We have experience in this area and are happy to help.

RYAN M. VOGEL, CFP® is the CHIEF PLANNING OFFICER, PARTNER at Novi Wealth