14th Mar 2014
Most of us have given a loan or a gift to family members, but we don’t always consider associated tax implications. While no one wants to pay income taxes unnecessarily, intra-family loans can benefit a high-asset estate when handled properly.
When making a loan from an estate to a family member, the income from interest can be written off on the lender’s taxes in a similar manner to mortgage payments. The main stipulation is that the lender charges the recipient the minimum interest rate at the time of the loan, which is published by the IRS. If the rate is lower than the minimum, the loan will be considered a gift from the lender to the recipient.
While it may sound strange or cruel to charge a family member interest on a loan, the arrangement can actually be mutually beneficial. The minimum interest rate is very low, which allows the lender to set very generous terms that an institution such as a bank would never offer. And for loans of high dollar amounts, the small amount of interest could easily be less than the taxes to be paid on a gift of the same amount.
Plus, a loan like this would not have to be used to buy a house or a car, for example, but could be used for an investment. Therefore, the returns on an investment by the loan recipient could exceed the loan interest, resulting in a net profit for the recipient while the lender is able to move assets out of their estate and collect interest.
For more information about ways you can better manage your estate, contact The Roberts Law Firm in Chesterfield, MO. Our experienced estate planning attorneys will help you and your family create and maintain an estate plan custom-made for your future.