A 2011 federal law levies estate taxes exceeding $1 million for individuals or $2 million for married couples by 55 percent. Any gifts to individuals over $13,000 in any given year may also be taxed as much as 45 percent with the exception of a lifetime exemption of $1 million per donor. For any individual who is concerned about the consequences of this tax, intra-family loans can be used for estate planning purposes, as any realized gains will be treated as exempt from all inheritance and gift taxes.
During our initial consultation with all of our estate planning clients, our company will determine whether our clients are subject to estate taxes and whether they can use intra-family loans to reduce the value of their estates. The appreciation of any investment made with the loan is earned outside our client’s estate, as long as it is above the IRS rate. Intra-family lending rates have fallen by as much as 53 percent since 2008. Because interest rates are low and most asset values - such as stocks and real estate – are depressed, there is a much greater likelihood that any investment purchased with intra-family loans in 2010 will be valued more than the cost of borrowing.
The three-year intra-family lending rate made in January 2010 is currently 0.57 percent. The rates are 2.45 percent for loans of three to nine years and 4.11 percent for loans of nine years or more. These rates compare to the average rates of 10.55 percent for personal bank loans and 12.51 percent for credit union loans.
Parents can lend money to their children to buy a business and children can repay the loan using the profits from the company. Any future appreciation or income earned from the business beyond the loan amount is then considered part of the children’s estate and the parent’s property remains protected. In addition, amounts above the 1.65 interest rate will be awarded to children free of all property and gift taxes.
Family members should be aware the loan must be repaid with interest at a rate determined by the IRS. If the borrower does not repay, it can be considered a gift subject to gift tax.
