Intra-family loans

C. Christine Borrett (Associate, Crady, Jewett & McCulley, LLP, Houston, Texas) and Matthew A. Goossen (Associate, Crady, Jewett & McCulley, LLP, Houston, Texas) have recently published their article entitled Intra-family Loans, 47 Real Est., Prob. & Tr. L. Rept. 136 (2009).

The authors explain that

An intra-family loan can be a simple and effective estate planning tool for parents to transfer wealth to their children without gift tax implications. These loans can be made at interest rates lower than those available for commercial loans as children can borrow from parents and grandparents with interest payable at the applicable Federal rate (“AFR”). If children can produce returns on the assets in excess of the AFR, the loan transaction may accomplish significant estate planning objectives.

The strategies and techniques discussed in the article include:

• Leveraging assets and freezing values.
• Substituting notes with lower interest rates.
• Avoiding treatment as disguised gift.
• Discharging the debt.
• The personal guarantee.
• Loans to grantor trusts.
• Self-canceling installment notes.
• Income tax reporting under the installment method.
• Intra-family loans in the estate administration context.