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T&E TALK: Make an Intrafamily Loan “Bona Fide” to Avoid Gift Tax

Posted by Scott T. Ditman, CPA/PFS on Jun 13, 2016 1:00:00 PM
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Your first reaction when a child or family member comes to you for financial assistance is to take out your checkbook and write a check. You make a gift, plain and simple. But if you’re concerned about gift taxes, an intrafamily loan — a loan between family members — may be preferable if structured and managed carefully. If done correctly, the IRS will treat the loan as a bona fide loan rather than as a disguised gift.

Factors to determine loan legitimacy
The IRS considers will look at a number of factors when determining if a loan between related parties is legitimate. These factors include the:

  • Existence of a promissory note or other instrument,
  • Payment of a reasonable rate of interest,
  • A fixed repayment schedule,
  • Adequate collateral or other security,
  • Actual repayment of the loan,
  • Whether, at the time the loan was made, the borrower had a reasonable prospect of repaying the loan and the lender had sufficient funds to make the advance, and
  • The conduct of the parties.

The last factor is a catch-all that encompasses one of the distinguishing characteristics of a bona fide loan: the parties’ intention that the money advanced will be repaid. An examination of the first six factors may reveal conduct that’s inconsistent with a loan, such as failure to execute a promissory note or to repay the loan. Other conduct can indicate the lack of a debtor-creditor relationship, such as executing a promissory note after the fact or the lender’s failure to make reasonable collection efforts.

Proper documentation required
If you treat the transaction like a “real” loan, it’s more likely that the IRS will treat it as a loan as well. If you wish to make a loan to a loved one, we can help ensure it’s properly documented to pass IRS muster.

Should you have questions about how to structure an intrafamily loan, contact me at or your Berdon advisor.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.

Topics: T&E TALK

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