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When a Florida parent or other relative wants to help a younger family member financially, an intra-family loan may provide benefits not previously considered. Even though bank loans continue to carry historically low interest rates, the requirements for obtaining one can be intimidating, as banks continue to be stringent on borrower qualifications. A loan between members of a family can also carry low rates, as long as they meet the minimum levels established by the Internal Revenue Service.

An intra-family loan can be a way for an older relative to move money out of his or her estate. If the recipient invests the money, there is a potential for a net positive return, with the appreciation belonging to the borrower rather than in the lender’s estate. If the loan proceeds are used to purchase a residence, the interest may be tax-deductible for the borrower in the same manner as a loan from a bank or mortgage company.

Care should be given that the loan is both properly documented and is treated as such. If the interest rate being charged is less than the IRS minimum for a loan of that duration, then the difference could be treated as a gift from the lender to the borrower. If the loan is forgiven, gift treatment would likely apply as well.

The purpose of establishing an estate plan is often to protect and preserve a person’s wealth for the benefit of his or her survivors. An attorney with experience in estate planning may be able to provide useful guidance to a client to assure that the estate planning documents under consideration are appropriate for a particular situation.

Source: Life Health Pro, “Estate planning benefits of intra-family loans“, Tom Nawrocki, February 10, 2014