November 26, 2020

Volume X, Number 331


November 25, 2020

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November 24, 2020

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Intrafamily Loans: October Updates

 Intrafamily loans are ideal for parents and grandparents who want to assist younger generations of their family through either a direct loan of cash or a loan to a trust for the family member’s benefit. Intrafamily loans provide clients with an excellent tax planning strategy which, if successful, will transfer growth and income free of any wealth transfer taxes. In order to avoid having any part of an intrafamily loan considered a gift for tax purposes, specific guidelines must be followed, including charging a minimum interest rate, documenting the loan, and requiring repayment under the loan terms. The loan must bear interest at a rate greater than or equal to the Applicable Federal Rate (“AFR”), as published each month by the IRS.

The AFR is broken into three tiers depending on the term of the loan:  the short-term rate applies to loans of up to three (3) years, the mid-term rate applies to loans with a term between three (3) and nine (9) years, and the long-term rate applies to loans with repayment terms of greater than nine (9) years. 

For October 2020, the short-, mid-, and long-term AFRs are 0.14%, 0.38%, and 1.12%, respectively. Thus, for an intrafamily loan made in October with a term of less than three years, annual interest of only 0.14% must be charged to avoid any portion of that loan being treated as a gift. These low rates make intrafamily loans an especially beneficial estate planning strategy while the low interest rate climate lasts. Clients with existing promissory notes should also consider refinancing those notes to take advantage of the current rates. We also see many clients assisting children and grandchildren with home purchases by providing a portion or all of the funding for the purchase through a loan.

This article features contributions from David W. Kesner, Charles C. Kingsley, Leonard Leader,  Rani Newman Mathura,  Carolyn A. Reers,  Matthew E. Smith,  Arsineh Kazazian,  Mary Margaret Colleary,  Mi-Hae Kim, Erin D. Nicholls,  Kaitlyn A. Pacelli and Beth A. Scharpf.

© 1998-2020 Wiggin and Dana LLPNational Law Review, Volume X, Number 280



About this Author

Michael Clear Estate and Trust attorney Greenwich Wiggin and Dana

As a Partner in the firm's Private Client Services Department, Michael regularly counsels clients on the far-reaching financial implications of estate planning, estate and trust administration, probate litigation, and business succession planning. Yet he is also a trained counselor with insight into the family dynamics these matters can effect. Known for his empathy and good humor, he helps clients take prudent action in the face of indecision, hopefully resolving contested issues before litigation.

Michael's estate planning practice includes assisting individuals and families in...

Veronica Bauer Estate Planning Attorney

Veronica R.S. Bauer is a Partner in the firm's Private Client Services Department in Palm Beach, Florida. Veronica focuses her practice on estate planning, estate and trust administration and charitable planning and administration.

Her practice includes assisting individuals and families with tax-efficient and practical estate, gift and income tax planning. She also assists fiduciaries and beneficiaries through estate settlement and trust administration matters

Robert Benjamin Estate Planning Attorney Wiggin and Dana

Bob has over three decades of experience as an estate planning and probate lawyer and previously served as Chair of Wiggin and Dana's Executive Committee (2009–2015). He is a Partner in the Private Client Services Department and counsels foreign and domestic clients in matters relating to estate planning, probate, and the taxation and administration of trusts and estates. He often works with clients who have complex estate planning needs, such as family business owners and artists. He is also a resource to lawyers at other firms in situations where difficult family dynamics or complex...

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Karen Clute Tax attorney New Haven Wiggin and Dana

Karen is committed to helping clients navigate ever-changing tax and fiduciary rules. As a member of the firm's Private Client Services Department, Labor and Employment Department, and Philanthropy Practice Group, Karen has a wide-ranging practice grounded in a deep understanding of the intersections of personal-, community-, and employment-related tax, fiduciary, and financial concerns.

She advises individual clients about a broad range of estate planning issues, with an emphasis on estate and income tax planning. She works with executors and trustees on fiduciary matters and...

Daniel Daniels Estate planning lawyer Wiggin Dana

For three decades, Dan has dedicated himself to counseling families in preserving wealth from generation to generation. His clients include affluent individuals, family offices, business owners, C-suite executives and private equity and hedge fund founders. He assists them in estate and business planning, trust and estate administration, probate litigation, and more.

Dan has been named by Worth magazine as one of the top 100 trust lawyers in the United States. He is one of six trust and estate lawyers in Connecticut ranked in Band 1 by the international ranking service ...