The Benefits of Intra-family Lending

With this blog, we return to the subject of gift planning. Clients like the idea of reducing taxes with gifting, but the problem is they actually have to give away an asset. When the client expresses an interest in gift planning, We ask them "What amount of assets do you have to own to feel comfortable giving away something?" The answer is usually "just a little bit more!”

     A common issue that arises when we discuss gift planning with a client is the desire to assist their children without giving up control of the assets. One strategy used in this situation, which allows clients to provide funds for family members' use while still protecting the client’s own interests, is intra-family lending. 

     An intra-family loan works much like any other loan, parents loan money to a child for a specific amount of time and at a specific interest rate. For example, a client agrees to lend $200,000 to her son to help finance a business purchase. The son signs a promissory note with specific repayment terms and a mortgage on the new business as security for repayment of the loan. This intra-family loan allows the son to purchase a business he could not otherwise afford and begin securing his own financial future. The client, over time, will get an annual interest payment as well as a return of her principal. If the child's business earns more than the principal and required interest, the child benefits from the loan, and the client has effectively transferred wealth to her son that he would not otherwise have had. 

     While the annual interest payment and opportunity to run their own business are clear benefits to the client and her son, the benefits of an intra-family loan, as opposed to a bank loan, also include:

1. The parents' ability to set an interest rate far lower than any interest rate available through a bank. While the Internal Revenue Service regulations require that the interest rate of the loan equal a minimum rate set by the IRS each month, the current annual rate is just 2.19% for loans with a duration of more than nine years and significantly lower for shorter loans. If the parents desire, they can charge an interest rate greater than minimum rate but lower than current bank savings rates, increasing the parent’s benefit and still give a benefit to the child.
2. The parents give the child the opportunity to have access to an eventual inheritance much earlier, with much less risk. The parents can also assess the child's abilities to handle the money and perhaps modify the distribution provisions of their estate plan. 
3. In the event parents want to provide their child with an additional benefit, they can use their Annual Gift Tax Exemption to provide their children with the funds to reduce the principal of the loan, without the worry that the child will frivolously waste such gifts.

     To protect the client and avoid potential problems, it is important that clients document any intra-family loan's amount, term, interest rate, and repayment schedule in a formal written contract. This is important not only to ensure a return of the parent's money, but also for protecting the client against an IRS claim that the transaction was a gift, not a bona fide loan.  Courts have held that the existence of a written document evidencing the debt, the charging of a specific interest rate, the existence of a set repayment day, and proof of actual repayment of the loan are all criteria that favor the position of a transfer was a bona fide loan.

     Intra-family lending is a very useful technique for clients who want to provide gifts to their children, while retaining control of their own assets. As with all tax related strategies, clients should seek the advice of a qualified professional before engaging in an intra-family loan. Proper planning can provide benefits to both the borrower and the lender.

Private Information, Security, and your Estate Plan

Locating and gaining access to a loved one's assets during an emergency or after their death can be one of the biggest challenges. Today's blog addresses how clients can provide their loved ones with access to this information without risking identity theft. 

     We often mention, to our clients, and in this blog, the importance of maintaining a record of important information. This list can include the location of accounts, login information and passwords for online accounts, contact information for planners and advisors, and other sensitive personal information to avoid creating problems for loved ones attempting to administer the client’s affairs in the event of an emergency or their death. However, we rarely discuss how the client can safely maintain a collection of information, which, in the wrong hands, can lead to significant financial hardship. We recommend a combination of high-tech and low-tech solutions to maintain security while also making information accessible in the event of an emergency.

     First, we provide our clients with a worksheet designed to assist them in documenting much of the important information someone would need to administer their affairs in the event of their death or an emergency. On this worksheet, we recommend that our clients provide their loved ones and designees with important, but not private, information. This includes the names and contact information for planners and advisors, a list of utility providers, nonfinancial online accounts (including social media and shopping sites), and a list of known creditors. This is the information loved ones will need in order to handle the client’s day-to-day affairs. We encourage our clients to inform their loved ones of the location of this information so that it is easily accessible in the event of an emergency. 

     Second, with respect to information that in the wrong hands creates a risk of identity theft or loss of assets, including specific account information, passwords for online access to financial accounts, and private personal information, we encourage our clients to prepare a secure document containing this information, the location of which the client guards more closely. While the increased security makes accessing this information more difficult, it primarily impacts information that a loved one would only need if it became necessary to manage the client’s affairs in the long term.

     There are increasingly complex ways to protect private information, while still making it available in the event of an emergency. The simplest, but least secure, way is for the client to prepare a written list of the information and provide their designee with the location of that list. Using technology to increase security, the client can prepare a document containing the information, save that document to a flash drive and store the flash drive in a location known to their designee. For even more security, the client may use an online password management service, designed to provide a high degree of protection for all of their online accounts and private information. Using this method, the client will store the important information using the service and provide their designee with the secure password needed to access client’s information.

     Regardless of the method employed to secure all of this information, the underlying important concept we are attempting to convey is the importance of client preparation for emergencies. By taking the time to prepare lists like the ones we have discussed in this blog will allow clients to minimize the stress and inconvenience to their loved ones in the event of an emergency.