Lower Interest Rates Enhance Estate Planning Strategies – Intra Family Loans

Parents’ and grandparents’ ability to loan money to children and grandchildren is greatly enhanced in the current low interest rate environment.  In a typical intra family loan transaction, the lender, usually a member of the senior generation, loans money to the borrower, a member of a more junior generation.  The borrower may use the funds to purchase an asset, such as a home or investment asset, or to start a business.

If the borrower invests the loan and is able to realize a rate of return in excess of the interest rate, the lender has made a tax-free transfer to the borrower.  If the borrower uses the loan to purchase a home, the lender has made a tax-free transfer to the borrower measured by the savings the borrower achieves compared to a commercial loan.  Often the promissory note is structured as a balloon note requiring repayment only at the end of the note term.  The borrower often makes interest payments only until the balloon payment is due.

Often an intra family loan is used in connection with the sale of an asset by the member of the senior generation.  For example, the sale by parents of the family lake home or an interest in the family business to members of the junior generation on a low interest promissory note can be used to keep closely held assets in the family.  The low interest rates currently in effect make these transactions more affordable for the junior generation.