If you have outstanding loans to your children, grandchildren, or other family members, consider forgiving those loans to take advantage of the current, record-high $11.58 million gift and estate tax exemption. Bear in mind that in 2026, the exemption amount is scheduled to revert to $5 million ($10 million for married couples), indexed for inflation.
Under the right circumstances, an intrafamily loan can be a powerful estate planning tool because it allows you to transfer wealth to your loved ones free of gift taxes — to the extent the loan proceeds achieve a certain level of returns. But an outright gift is a far more effective way to transfer wealth, provided you don’t need the interest income and have enough unused exemption to shield it from transfer taxes.
Do Intrafamily Loans Save Taxes?
Generally, to ensure the desired tax outcome, an intrafamily loan must have an interest rate that equals or exceeds the applicable federal rate (AFR) at the time the loan is made. The principal and interest are included in the lender’s estate, so the key to transferring wealth tax-free is for the borrower to invest the loan proceeds in a business, real estate or other opportunity whose returns outperform the AFR.