How do I use family loans for estate planning purposes?
Let’s say you want to help your child buy a home, but you don’t want to just gift them the money for a variety of potential reasons, such as:
The gift will reduce your estate exemption and require the filing of a gift tax return.
You may feel like gifting that much money to a child with no strings attached would spoil them or perhaps reduce their economic incentive to better themselves (learning through earning).
Maybe you simply don’t want to give away that much money because you could use it in your own retirement planning or for other purposes under your control.
For all of these reasons, a loan to your child, also known as an “intrafamily loan” may provide the results you are looking for.
The benefits are as follows:
Your child would still benefit because you allowed him or her to purchase a home at a more affordable interest rate (IRS requires you to use AFR interest rates for family loans but they tend to still be lower than going to a traditional bank).
Because your child has to make payments on that loan it builds financial maturity and helps them appreciate the purchase more (they have more skin in the game).
You get the benefit of building an income stream. While this isn’t the top priority for wealthy clients, it’s still nice to have money come in that should be low-risk and yield close to what you would make through a bond portfolio.
You can choose to securitize the loan by recording the mortgage at the registry of deeds (some risk protection there from both your child but also your child’s creditors, the latter being the more important point).
There are additional ways to use family loans to further reduce your estate taxes, like selling property to an intentionally defective grantor trust (IDGT) and having the trust borrow the money from you in order to make that purchase - but that is a much more complex process that I’ll cover in a separate article.
If you have additional questions about how to create a family loan, how to use a family loan as part of your overall estate plan, or if you’d like me to review or create a trust for you, then I’d be happy to help.
Just click the link below to schedule a call with me today!
