An Estate Planning Strategy for Intrafamily Loans
Posted by Robert Ingrasci on September 18, 2025
One of the most common estate planning goals is to ensure your family’s financial security while minimizing taxes. While gifts, bequests, and trusts are popular strategies, intrafamily loans are another option worth considering.
These loans, where one family member lends money to another, can help transfer wealth, support major purchases like a first home, or fund a business startup. But before you proceed, it’s important to understand both the benefits and the potential pitfalls.
Why Consider an Intrafamily Loan?
Flexibility is the biggest advantage. Families can often offer better terms than banks—lower interest rates, fewer fees, and more forgiving repayment schedules. Keeping money within the family also preserves wealth, and when structured properly, these loans can be a tax-efficient way to provide financial support while maintaining accountability.
From a tax perspective, intrafamily loans allow wealth transfer without triggering gift or estate tax provided you charge interest at the Applicable Federal Rate (AFR). If the borrower earns returns above the interest cost (for example, by investing in a business), those gains are tax-free. However, the loan principal remains part of the lender’s taxable estate, even if the lender passes away before repayment. If the loan is forgiven at death, that forgiveness is treated as a taxable transfer.
Avoiding IRS Pitfalls
The IRS often presumes intrafamily transfers are gifts, not loans. To ensure your loan is treated as legitimate, you must establish a bona fide creditor-debtor relationship. Courts look at several factors, including:
- A signed promissory note
- Interest charged at or above AFR
- Collateral or security
- A fixed maturity date
- Evidence of repayment and ability to repay
- Proper recordkeeping and tax treatment
Intent and expectation of repayment are critical. Without these formalities, the IRS may reclassify the loan as a gift, triggering unwanted tax consequences.
The Drawbacks
While intrafamily loans can be financially smart, they carry emotional risks. Mixing money and family relationships can lead to tension—especially if repayment becomes difficult. Lenders may feel taken advantage of, and borrowers may feel pressure or resentment.
Bottom Line
Intrafamily loans can be a powerful estate planning tool, but they require careful structuring and clear communication. If you’re considering this strategy, work with a qualified advisor to ensure compliance and protect family harmony.
Contact us to explore whether an intrafamily loan is right for your estate plan.
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Bob is an experienced tax professional who devotes his professional time to structuring tax strategies in the areas of compliance, consulting, and planning. Bob works closely with a broad range of high-net-worth individuals and multi-generational families, specializing in the areas of gift and estate planning, charitable gift planning, trust and estate administration, individual taxation, and wealth preservation. Bob serves as a practice leader in the Family Wealth and Estate Planning group. Bob joined Lumsden McCormick in 2008 and was named partner in 2022.