Intrafamily Loans: How to Act as the “Bank” for Your Heirs
Tax Tips / Family Banking
Intrafamily Loans: How to Act as the “Bank” for Your Heirs
💡 Executive Summary
- Problem: Gifting money directly to children (e.g., for a house or business) consumes your Lifetime Estate Tax Exemption ($13M+).
- Solution: Lend the money instead, charging the minimum IRS-mandated interest rate (AFR).
- Result: Any investment growth above the interest rate (Hurdle Rate) passes to your heirs 100% Gift Tax-Free.
⚠️ THE “FORGIVENESS” TRAP
If you lend the money but never collect interest or eventually “forgive” the loan without a reason, the IRS reclassifies the entire amount as a Taxable Gift. You must act like a real bank (Promissory Note + Annual 1099-INT).
If you lend the money but never collect interest or eventually “forgive” the loan without a reason, the IRS reclassifies the entire amount as a Taxable Gift. You must act like a real bank (Promissory Note + Annual 1099-INT).
In the UHNW ecosystem (Tier L3+), “The Bank of Mom & Dad” is not a casual favor; it is a structured wealth transfer vehicle. By leveraging historically low AFRs, families can shift millions of dollars of upside to the next generation without touching their exemption.
🧐 Core Mechanic: The AFR Spread
If the IRS AFR is 4.0% and your child invests the loan proceeds in a business or real estate earning 10.0%, the 6.0% spread is wealth transferred completely free of gift/estate tax.
If the IRS AFR is 4.0% and your child invests the loan proceeds in a business or real estate earning 10.0%, the 6.0% spread is wealth transferred completely free of gift/estate tax.
Performance Simulation
Wealth Transfer ($2M Loan to Child)
Commercial Bank Loan (7% Rate)
Interest Paid to Strangers
Wealth Leakage
Intrafamily Loan (4% AFR)
Interest Stays in Family + Spread
100% Efficiency
AFR Term Structures
| Term Type | Loan Duration | Typical Use Case |
|---|---|---|
| Short-Term | 0 – 3 Years | Bridge Loans / Startup Capital |
| Mid-Term | 3 – 9 Years | Business Expansion / Car |
| Long-Term | 9+ Years | Home Purchase (Mortgage) |
“Intrafamily loans teach financial responsibility. Heirs are not receiving a handout; they are receiving ‘access to capital’ on favorable terms. It changes the mindset from entitlement to stewardship.”
🔗 Related BMT Playbooks (Internal)
🛡️ Advanced Version: Sale to IDGT (Loan to Trust instead of Person) ⚖️ The Admin: Family Office (Who manages the paperwork) ✅ Data: Current Month’s AFR Rates🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 7872 (Below-market loans) 🏛️ IRS Official: Applicable Federal Rates (Monthly) 📘 Resource: National Family Mortgage (Admin Service)
BMT designs for tax reality, not theory.