If you’re interested in lending money to your children or other family members, consider establishing a “family bank.” These entities enhance the benefits of intrafamily loans, while minimizing unintended consequences.
Upsides and Downsides
Lending can be an effective way to provide your family financial assistance without triggering unwanted gift taxes. So long as a loan is structured in a manner similar to an arm’s-length loan between unrelated parties, it won’t be treated as a taxable gift. This means, among other things:
- Documenting the loan with a promissory note;
- Charging interest at or above the applicable federal rate;
- Establishing a fixed repayment schedule; and
- Ensuring that the borrower has a reasonable prospect of repaying the loan.