Benefits of Intra-Family Loans

With bank loans being harder to come by, children are turning to their parents for intra-family loans.  These loans aren’t just a good deal for the recipient; they can also provide estate planning benefits for the lender.  Here are a few advantages of intra-family loans: 

• Low rates.  The lender can set very favorable terms for the loan as long as minimal interest is charged (0.30% for short-term, 1.56% for mid-term, and 3.56% for long-term). 
• Estate benefits.  Intra-family loans can allow high-net-worth parents to move assets out of their estate, which a child can use to make an investment. 
• Transfer partnership interests.  Parents can sell their interest in a family limited partnership in exchange for a promissory note.  The interest would then be owned by the child, and the unpaid balance on the note would be all that’s left in the parent’s estate. 
• Interest may be deductible.  If the loan is used to buy a home and is recorded as a lien against the property (like a mortgage), the interest may be tax-deductible for the borrower.

See Tom Nawrocki, Estate Planning Benefits of Intra-Family Loans, LifeHealthPro, Feb. 10, 2014. 

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.