Overview
An intra-family loan lets you help a family member, or a trust for your family, while moving future growth out of your estate. Instead of making a gift, you lend money at the lowest interest rate the IRS permits, the applicable federal rate. Any return the borrower earns above that rate stays with your family, free of gift and estate tax, and no lifetime exemption is used.
How It Works
The interest rate depends on the length of the loan: the short-term rate for loans of up to three years, the mid-term rate for loans of three to nine years, and the long-term rate for longer loans. The rate in effect when the loan is made is generally locked in for its full term. A loan at or above the applicable federal rate is not a gift, and the borrower can invest the proceeds, buy a home or fund a business.
Common Uses
- Helping a child buy a home, often secured by a recorded mortgage, which may allow the child to deduct the interest
- Funding a family business or investment
- Loans to trusts for your family, including grantor trusts, where the interest generally has no income tax effect
- Refinancing an existing family loan when rates fall
- You lend $2 million to a trust for your children for nine years, at the 5.52% mid-term applicable federal rate, with interest paid annually.
- The trust invests the money and earns 8% a year.
- After repaying the full $2 million, the trust keeps about $620,000, all outside your estate, without using any of your lifetime exemption.
Hypothetical illustration using an assumed investment return, a mid-term applicable federal rate assumed as of November 2026, the 40% federal estate tax rate and, for New York residents with a taxable estate, a combined federal and New York rate of about 50%. It ignores income taxes. Not a prediction or a result for any client; actual results depend on many factors.
Considerations
- A genuine loan. The loan should be documented with a signed promissory note, a fixed repayment schedule and, where appropriate, security, and payments should actually be made. Otherwise, the IRS may treat the transfer as a gift.
- Interest income. Interest you receive is generally taxable income to you, unless the borrower is a grantor trust you created.
- Forgiving payments. Forgiving payments using your annual exclusion is possible, but a pattern of forgiveness planned from the outset may cause the IRS to treat the entire loan as a gift.
- Fairness among children. Your estate plan should address whether loans to one child are counted against that child’s inheritance.
- Interest rates. The technique is most effective when the applicable federal rate is low relative to the expected return on the borrowed funds.