The Family Bank: Intra-Family Loans & AFR
The Family Bank: Intra-Family Loans & AFR
Stop giving handouts; start offering hand-ups. How to act as a lender to your heirs using the IRS Applicable Federal Rate (AFR).
Executive Summary
- The Handout Problem: Outright gifts often kill ambition (“Entitlement”). Loans, however, create accountability. The “Family Bank” lends money to heirs for productive assets like homes or businesses.
- The AFR Advantage: The IRS sets the minimum interest rate for private loans (Applicable Federal Rate). This is typically much lower than commercial bank rates. You can lend to your child at ~4% when banks charge 7%.
- Keeping Interest in the Family: When a child pays interest to a bank, that money is lost forever. When they pay interest to the Family Bank, the wealth remains within the family circle.
The “Sham Loan” Warning
If you do not enforce repayment, the IRS will reclassify the loan as a Gift, triggering gift taxes and penalties. You must have a written Promissory Note, a fixed payment schedule, and actual records of payments received.
Mechanic: The Lending Protocol
IRS AFR
Lowest Legal Rate
Promissory Note
Required Document
Security
Mortgage / Lien
Forgiveness
Annual Gifting Option
Simulation: $1M Home Purchase (Bank vs. Family)
Total Interest Paid over 30 Years
| Feature | Commercial Bank | Family Bank |
|---|---|---|
| Interest Rate | Market Rate (High) | IRS AFR (Low) |
| Down Payment | Strict (20%+) | Flexible (0% possible) |
| Missed Payment | Foreclosure / Credit Hit | Restructure / Forgiveness |
“Money given without effort is often spent without thought. A loan teaches the value of a dollar, even if the lender loves the borrower.”
Essential Resources
INTERNAL
BMT Playbooks
EXTERNAL
Primary Sources