With soaring home prices and interest rates not easing, more clients are asking how they can help their children or grandchildren afford that first home. One strategy that’s increasingly being used is an intra-family loan. When structured properly, this lending strategy offers both flexibility and meaningful estate planning benefits. Yet, it remains underutilized by many advisors and families.
As advisors, we have an opportunity to help clients understand how intra-family loans work and how they can be implemented thoughtfully to support family members while advancing long-term planning goals.
Why Consider an Intra-Family Loan?
An intra-family loan is a private loan between family members, typically from a parent to a child. Unlike outright gifts, these loans must be documented and comply with Internal Revenue Service rules, but they allow clients to provide financial assistance without relinquishing control or incurring unintended gift tax consequences.
These loans are particularly attractive because they:
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Allow clients to lend any amount, regardless of the borrower’s credit or assets.
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Can be structured creatively, with repayment terms and interest rates that align with the family’s goals.
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May be forgiven incrementally over time to leverage annual gift tax exclusions.
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Serve as a wealth transfer vehicle, especially when used to finance appreciating assets like real estate.
Structuring the Loan Properly
To avoid unintended gift or income tax consequences, intra-family loans must be structured with formal documentation and interest rates at or above the applicable federal rate, which the IRS updates monthly.
The AFR varies based on loan duration:
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Short-term: up to three years
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Mid-term: three to nine years
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Long-term: more than nine years
In our experience, many families opt for mid-term loans, even when they anticipate a longer payback period. The loan can always be restructured or refinanced after the initial term ends. The benefit? AFR rates are typically well below commercial lending rates, and borrower creditworthiness has no bearing on the rate.
Once the AFR is selected and the term is agreed on, a promissory note should be drafted, including an amortization payment schedule. The note can mimic a conventional mortgage with regular principal and interest payments or take the form of interest-only payments with a balloon payment at maturity. The structure should match the family’s objectives and include provisions for default, payment frequency and refinancing flexibility.
Tax and Estate Considerations
The lender must report any interest received as taxable income. However, many clients view this as an indirect gift by paying taxes on income that ultimately benefits their children.
If the client wishes to forgive the loan (in part or in full), advisors can guide them in using the annual gift tax exclusion—currently $19,000 per recipient in 2025 ($38,000 for married couples electing gift-splitting). Forgiving more than this in a given year will reduce the client’s lifetime gift and estate tax exemption and require a gift tax return. If interest is forgiven, it may still be considered taxable income to the lender.
Proper documentation is essential not only for IRS compliance but also to ensure clarity for all parties and preserve family harmony.
Facilitating the Family Conversation
Clients may hesitate to broach the subject with their children, fearing it will seem transactional or intrusive. In these cases, advisors can offer to facilitate a family meeting. Explaining the purpose and structure of the loan helps set expectations and removes ambiguity. Clients can frame it as an opportunity to help and an efficient estate-planning strategy. The key is ensuring the loan reflects real terms and expectations, just like a bank loan, but with more favorable conditions.
Thoughtful Execution
As advisors, we’re always looking for strategies that balance family goals with long-term planning. Intra-family loans check many boxes: helping the next generation, preserving wealth and enhancing tax efficiency. But their success depends on thoughtful execution and the guidance of a professional team.
Before proceeding, clients must assess their financial capacity and work closely with their advisor and accountant to ensure the loan is structured correctly and remains in compliance.
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