Estate Planning

Intrafamily Loans

Father and son working over a laptop computer discussing intrafamily loans

Even in light of recent Federal Reserve rate hikes, interest rates still remain near historic lows. It’s an environment that presents a unique opportunity for a less frequently used estate planning strategy—the intrafamily loan.

For wealthy families, loans (typically from parents to their adult children) can be an invaluable tool for funding an array of needs such as purchasing a new home or investment property, financing a start-up business or paying for grad school. The borrower is able to secure a loan at an interest rate that may be considerably lower than rates available from traditional lenders, especially if they have a less-than-perfect credit history. In addition, rather than paying fees, closing costs and interest to a third party, all payments made can remain in the family. And if properly structured and administered, an intrafamily loan won’t impact your lifetime gift tax exemption, since it’s classified as a loan rather than a gift.

With current interest rates on a 30-year mortgage averaging 4.25 percent and home equity loans averaging 5.25 percent,1 the minimum IRS acceptable interest rate—termed the Applicable Federal Rate (AFR)—for an intrafamily loan to qualify as a loan rather than an outright gift, is considerably lower. The following table shows current minimum acceptable AFRs for loans between family members as of May 2017, depending on the duration of the loan2:

Loan Type

Loan Duration



Less than 3 years



Between 3 and 9 years



More than 9 years



Because of this disparity, some families use intrafamily loans as a means of transferring wealth outside of their estate. For example, you could provide your daughter with a $1 million loan for eight years at the current mid-term AFR of 2.04 percent with the understanding that she will invest that money for the duration of the loan. If the borrower is able to achieve a 7 percent return on her investments, she would end up retaining approximately $500,000 in market returns after paying back all principal and interest.

Effectively, you would have transferred half a million dollars without impacting your lifetime gift exemption. And the interest you receive on the loan may actually exceed the rate you would otherwise receive if that money were sitting relatively idle in a money market fund or CD.

Establishing a proper loan structure

In order to not run afoul of the IRS, it’s essential that intrafamily loans are structured and administered as true loans in order to show that a genuine debtor-creditor relationship exists. At a minimum, you’ll want to establish and document a promissory note with a fixed repayment schedule that includes an interest rate equal to or greater than the most recent AFR, secure the debt with some form of collateral and keep records of all payments. Additionally, as the lender, you will need to report any loan interest you receive as taxable income. However, the borrower may be able to deduct the interest paid on the loan.

If you fail to meet these requirements or ultimately decide to forgive the loan, you’ll either have to use your gift tax exemption or pay gift taxes of up to 40%. And the borrower may have to pay income tax on the amount forgiven at his or her ordinary income tax rate.

Intrafamily loans certainly aren’t right for all situations and are by no means a wealth transfer cure-all. Used thoughtfully and administered carefully, however, they can serve as a valuable financial planning tool that enables you to financially help out your adult children while instilling in them the fiscal responsibility that comes with paying off debt.

Find out more    

Your SunTrust Private Wealth advisor can discuss the benefits and requirements of intrafamily loan options.

1 Bankrate, May 10, 2017

2 IRS Index of Applicable Federal Rates (AFR) Rulings, May 2017

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