Tapping into the "Family Bank"

Learn how intra-family loans may help your loved ones.

  • Private Wealth Management

Key takeaways

  • An intra-family loan may help loved ones buy real estate, invest in a business, or pay down high-interest debt.
  • In addition, an intra-family is one of many available strategies that may enable families to transfer growth on their wealth without making an outright gift. Families should consult with their legal and tax advisors to determine if an intra-family loan may be appropriate for them.
  • Care must be taken to structure the loan properly so that the Internal Revenue Service does not consider the transaction a gift, which could have unintended estate-planning implications.

When individuals need to borrow money, they typically look to either large banks, local credit unions, or mortgage companies (when buying a home). Regardless of the source of funds, the process is very structured. The individual completes a loan application, the lender runs a credit inquiry, an interest rate is quoted (among other potential steps), and the loan is either approved or denied. For some families, however, there may be another option: an intra-family loan.

Individuals may not feel comfortable approaching a family member to borrow money or may be unaware of the potential benefits, such as lower interest rates, that a private loan may offer. Parents may also not be comfortable making outright gifts to their children but they may wish to help their loved ones with their goals of buying real estate, investing in a business, or paying down high-interest debt.

If structured properly, an intra-family loan may be beneficial to both parties. Even if the child does not have a specific need for the money, this strategy may help families transfer a portion of the earnings on wealth to the next generation without reducing the lender’s lifetime estate tax exemption (currently $12.06 million per person for 2022) or paying gift taxes. If structured improperly, however, this arrangement may cause adverse and unintended tax consequences.

A word of caution

An intra-family loan is a nuanced strategy with many moving parts and a number of potential tax consequences, including implications for estate, gift, and income taxes, all of which should be considered in deciding whether an intra-family loan is right for you and your family. In order for the transaction to be respected by the Internal Revenue Service (IRS) as a loan (rather than treated as a gift), the parties must comply with a number of requirements. We discuss only some of these requirements in this article, and it is not meant to be an instruction manual for how to draft such an arrangement. Rather, this article is intended to highlight the potential advantages and disadvantages of the strategy as well as identify some of the factors that would support treating the transaction as a loan. You should consult with experienced legal and tax advisors when deciding if an intra-family loan is right for you.

Benefits of and considerations for intra-family loans

For families that have the means and are comfortable lending money to a family member, an intra-family loan may make sense and can be implemented with relatively low upfront costs. Intra-family loans also may offer greater flexibility than commercial loans since the repayment terms can be structured based on the borrower's specific needs and circumstances. For example, an adult child may want to start a business that requires upfront capital to get up and running. If the child borrows from a commercial lender (if that option is viable), the repayment of the loan will begin almost immediately, at a time when cash flow may be strained or when the borrower may be seeking to reinvest in the business for future growth. If the child borrows from a family member, the loan could be set up as an interest-only loan with a balloon payment due at some point in the future, presumably when the business is producing adequate cash flow.

Other potential uses of intra-family loans include providing funds so that the borrower can purchase a home or create an investment portfolio. An intra-family loan may also provide greater flexibility because (1) the borrower doesn’t necessarily need a pristine or lengthy credit history (provided that the borrower still has a reasonable likelihood of repaying the loan), and (2) the loan can be structured so that the borrower has no limitations on how the funds can be used.

Additionally, while parents may be able to give money outright, or in trust, to their children, loaning money to them via an intra-family loan may provide children a sense of ownership over how they use the funds and of responsibility to make timely payments. It may also allow for deeper conversations relating to money and wealth, providing an opportunity for family members to discuss their goals and wishes.

However, be mindful that every financial decision has the power to create closeness or distance in family relationships. When trying to determine if an intra-family loan is appropriate in your situation, some questions to consider may include:

  • Will lending to one child cause other children to feel this arrangement is unfair to them?
  • Should different types of loans be considered for different children, based on their personal situations?
  • If the child is unable to, or chooses not to, pay back the loan, will a loan default cause family friction?

Estate planning considerations

An intra-family loan may be an effective way to transfer the potential future growth of wealth to other family members without reducing the lender’s lifetime estate tax exemption (i.e., when the growth rate of the investments exceeds the interest rate charged on the loan). For example, if a borrower used the loaned funds to establish an investment portfolio and the investment portfolio grows at a rate greater than the interest rate charged on the loan, the lender would have transferred a portion of the growth on the loaned funds to the borrower without using any of the lender's estate tax exemption.

However, as always, you should consider all potential tax consequences of the transaction, including income tax consequences for the relevant parties (for example, an intra-family loan may eliminate the possibility of a step-up in the cost basis of an investment portfolio and thereby result in increased capital gain taxes that the borrower would not otherwise have owed). Additionally, an intra-family loan typically only transfers potential growth on a lender’s estate; it does not necessarily reduce the lender's gross estate because the loaned funds plus interest are intended to be repaid and would therefore be included in the lender’s estate. When the loan is established, it should include language to reflect how the lender wants the loan to be treated upon his or her death. It may make sense to update the lender’s will or trust documents to reflect these details as well. Options include forgiving the debt and/or reducing the borrower’s inheritance.

In addition to lending funds to an individual family member, it is also possible to loan funds to a trust. The same considerations would generally apply, with a few differences. The loan would be made to a trust rather than to an individual and the trust must be funded with collateral, or seed money, to be considered a bona fide borrower. Further, the grantor (lender) can establish a trust where they are the owner of the trust for income tax purposes but not for estate tax purposes. This type of structure is known as an intentionally defective grantor trust (IDGT). The benefit of an IDGT is that income taxes are paid by the grantor (thus potentially reducing the grantor’s taxable estate) and not by the trust itself, which allows the trust assets to grow without reduction for income taxes. At the end of the grantor's life, the assets in the IDGT will not be included in the grantor's taxable estate. (For more information about trust taxation, please see Trusts and taxes: Exploring the Federal income tax implications of trust strategies.) The rules regarding trusts are complicated, and you should consult with your legal and tax advisors when considering this structure.

Tax requirements for bona fide loans

If an intra-family loan might be right for you and your family, great care needs to be taken to ensure that it is implemented in a manner such that the IRS considers it a legitimate loan and not a gift in disguise. The IRS takes the position that a transfer of money to a family member is a gift, unless the lender can prove that they received full and adequate consideration in return for the transfer. The determination as to whether an intra-family transfer constitutes a loan or a gift is not based on hard and fast rules, and there are several factors that the IRS and courts consider to decide whether a transfer is a bona fide loan. These factors include whether (1) there is a signed promissory note that includes key terms, (2) interest is charged, (3) the lender has security or collateral, (4) there is a fixed maturity date, (5) any actual repayment is made or demanded, (6) the borrower has a reasonable likelihood of repaying, and (7) there are any records maintained by the lender and/or the borrower reflecting the transaction as a loan. None of these factors on its own will ensure the IRS will consider such a transaction a loan, and given the complexity and nuance in this area, you should consult with experienced legal and tax advisors to structure any loan in a manner designed to reflect the intended tax treatment.

Interest rates: Understanding a key element of intra-family loans

As with a traditional loan, an intra-family loan requires an adequate interest rate be charged for the use of the funds to avoid adverse income or gift tax consequences. The IRS publishes a set of Applicable Federal Rates (AFRs) each month, setting the minimum interest rates it will allow for private loans without generating additional "deemed" transfers between the lender and borrower. AFRs are generally lower than what a borrower can obtain from a commercial lender—often one of the key benefits of an intra-family loan. The short-term AFR applies to loans with terms of 3 years or less, the mid-term AFR applies to loans between 3 and 9 years in length, and the long-term AFR applies to loans longer than 9 years. If an intra-family loan charges an interest rate below the appropriate AFR, it may result in additional gift and income taxes to the lender and/or reduce the lender’s lifetime estate tax exemption amount.

Other Important Tax Considerations

  • In addition to estate planning, it is important to consider other potential tax implications of an intra-family loan. As discussed further below, establishing the debtor-creditor relationship is critical in determining whether the loan is truly a loan or merely a gift in disguise. If the intra-family loan interest rate is at or above the AFR when the loan is executed and all the other requirements of a bona fide loan are met, there should be no gift tax due or reduction in the lender’s lifetime estate tax exemption as a result of the loan. If the IRS determines the loan is actually a gift, it may reduce the lender’s estate tax exemption and/or result in gift taxes in the year in which the funds were transferred to the family member.
  • An intra-family loan will also have income tax consequences for both the borrower and the lender. For income tax purposes, any interest received by the lender on an intra-family loan is considered interest income and is taxable at ordinary income tax rates, much like if the lender were to invest in a corporate bond or certificate of deposit and receive interest payments. Under certain circumstances and subject to certain limitations, if the borrower uses the funds to start a business, make investments, or buy a home, the interest payments may be deductible by the borrower for income tax purposes. However, borrowers cannot deduct interest payments if the loan is used to pay off credit card debt, personal expenses, or an unsecured home loan. The lender should ensure that appropriate tax forms are issued to the borrower, if applicable. The rules regarding whether interest is deductible by borrowers are complicated, and borrowers should consult with their tax adviser to determine whether interest payments may be deductible in light of their particular circumstances.
  • The paragraphs above discuss some of the potential tax consequences of using an intra-family loan at a very high level and are not intended to be exhaustive. You should discuss the transaction with your tax adviser to determine the full range of tax implications that may be applicable to your personal situation.


In today's low-interest-rate environment, intra-family loans may be an effective way to assist family members and, in certain circumstances, transfer potential growth on wealth without using the lender's lifetime estate tax exemption or causing the lender to pay gift taxes. Careful consideration needs to be given to the various consequences of the arrangement, including the income, estate, and/or gift tax implications. The tax rules regarding intra-family loans are complex, and such an arrangement may result in adverse and unintended tax consequences if not implemented correctly. Families interested in this type of transaction should consult with their legal counsel and tax advisor to discuss whether this type of arrangement is right for them and to structure the transaction in a manner designed to achieve the intended tax treatment.