In Perspectives, Wealth Planning

Intra-family loans have long been used as an effective planning tool to help families achieve specific goals. These goals can be more pointed, such as helping a family member buy a home or business, or more broadly focused on estate planning. In the right circumstances, intra-family loans can help support family members by giving them access to more flexible financing. This flexibility comes in the form of more attractive lending rates, as well as less stringent lending standards than would be required by a more traditional financial institution.

Purchasing Real Estate

There are many instances in which structuring an intra-family loan could make sense, but one of the most popular transactions we see involves the purchase of real estate. Rather than going through the process of getting a traditional mortgage, the purchaser could access family funds through an intra-family loan to obtain the financing. This can provide several benefits:

  • Intra-family loan interest rates can be set lower than a traditional mortgage, but must be set at a minimum rate of the applicable federal rate (AFR). Today’s long term AFR rate is 4.83% which is much lower than today’s 30-year mortgage rate, which is closer to 8%. And you are allowed to elect an AFR rate from up to two month prior, which can be helpful if rates have risen recently.
  • Borrowers don’t have to go through an underwriting process. This can help with situations that might be difficult through an institution, such as loaning to a trust, or making loans with a higher loan to value ratio.
  • In a competitive market, using an intra-family loan could help buyers position their offers as “all cash” by purchasing in cash up front and completing the financing process after the close.
  • Intra-family loans can be recorded as a mortgage, which allows the borrower to still take advantage of writing off the interest.

“Freezing” Estate Values

Intra-family loans can also help families limit their estate tax liabilities by “freezing” the value of the estate. In an extreme example, a family could lend the entirety of their assets to the next generation. The next generation could in turn invest those assets, and the spread between the return on investment and the interest payment due would pass out of the estate tax free. These loans can also be written as nonrecourse, which would prevent the risk of assets being moved from the second generation to the first generation in the event of market decline.

Is It Right For Your Family?

A key consideration in deciding whether an intra-family loan is right for your family is assessing the financial position of the person or entity that would be making the loan. Is there cash available? Would significant capital gains taxes need to be paid to make cash available? What kind of lending, such as margin, does this person/entity have access to? If the borrower fails to repay or defaults, would this affect your relationship? While the lender will receive an investment return equal to the loan agreement (or at a minimum, the AFR amount), they also need to be comfortable with limiting their upside, as well as taking on the risk of the potential loan default.

Record Keeping

Another important consideration is the operational aspect of an intra-family loan. Careful records will need to be maintained, including an original loan document and documents monitoring the interest payments and payback of principal. These detailed records are required to protect the lender in the event of an audit which would question if the amount exchanged was considered a gift or loan. Having a formal legal document in place or assistance with legal support to craft this agreement will benefit the borrower in the long run. To the extent the lender wants to use their annual gift exclusion amount or part of their lifetime exclusion amount, the loan could also be forgiven.

There are many factors to consider when deciding whether an intra-family loan is an effective structure for your family. If your goal is to help a family member without the use of an outright gift, this type of loan can be a powerful tool.

For personalized advice on how intra-family loans might effectively be utilized in your financial planning, contact your team at Crestwood Advisors. We are dedicated to guiding you through the intricacies of these loans and financial decisions beneficial for your family’s unique situation.



This document is provided for general informational purposes only and should not be construed as containing financial or investment advice. For individualized financial or investment advice, please consult your adviser. 

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