Intra-Family Loans: Lower Rates, Higher Risks

Small business owners who are trying to keep their restaurants, shops, and companies afloat during the coronavirus health crisis have started turning to their families for loans. Grandparents, parents, siblings, and other extended family members are some of the unsung heroes for small businesses. With ultra-low interest rates right now, the intra-family loans can be a valuable lifeline. But they do come with some risks and uncertainty.

Intra-Family Loans

An intra-family loan is a private loan. Unlike bank loans, you do not go through a public lender – but there are some similar lending documents involved. The money is being transferred between family members, but this is not an outright gift. The lender expects to be paid back. An intra-family loan can be structured in a few different ways. The loan can be interest-only, or payment of principal and interest. The lender can also structure the loan so that he or she gifts part of the principal to the family member borrowing the money. (If the lender does gift the principal, and that amount is more than $15,000/individual or $30,000/couple, then the lender would need to file a gift tax return with the IRS and use a portion of their lifetime gift tax exclusion).

The Family Bank

According to recent study conducted by Edward Jones and AgeWave, an overwhelming 71% of retirees said that they would gladly offer monetary support to family members who needed it – even if those loans jeopardized their own financial future. People are willing to risk their own money for the sake of helping other generations. Family members are lending money to each other, helping keep businesses up and running in hopes that once COVID-19 is over, the customers will return.

But before a family member agrees to an intra-family loan, it’s important to consider exactly how much they’re willing to give, and the uncertainty involved. While family support is important right now, you don’t want to sacrifice your life savings and financial security on something that might not be able to weather the storm. The borrower might also want to consider other financial options before entering into an intra-family loan.

Have Additional Questions? Contact Brian M. Douglas & Associates

How you spend and give your assets can greatly impact your tax liability and your estate. Our firm is here to help you and your family determine the best course for your unique financial situation. Reach out to Brian M. Douglas & Associates at (770) 933-9009 for more information about intra-family loans and your giving legacy.