As the economy continues on a slow path toward recovery, many young families are struggling to move ahead with their lives in the manner they once intended. Loans are increasingly harder to come by, especially for those just starting out in life. In such cases, many New Jersey families turn to intra-family loans to allow parents or other family members to lend money to their younger relatives. As it turns out, this scenario provides benefits to not only the borrowers, but the lenders as well through some lesser-known estate planning benefits.
For example, parents who choose to loan their children money can do so at a very low interest rate. These minimum rates are set by the Internal Revenue Service, and currently sit at 1.56 percent for loans paid back between a range of three and nine years. Rates for longer terms, begin at 3.56 percent. It is important to understand that these types of loans do not have to be for the purpose of buying a home, they can be used to make investments or for other purposes.
Loaning to family allows a high-net-worth couple or individual to move money out of their estate without consequence. As the loan is repaid the money will flow back into the estate. However, if the money was to be loaned for the purposes of allowing the family member to make an investment, a five-year investment would only have to pay back a return of at least 1.56 percent to make solid financial sense. Any appreciation will accrue in the estate of the borrower, not the lender.
When considering estate planning options, New Jersey families should examine the pros and cons of an intra-family loan. In many cases, such an option allows for benefits to both the borrower and lender. This is just one component of an individual’s overall estate planning strategy, but can be very useful in certain circumstances.
Source: lifehealthpro.com, Estate planning benefits of intra-family loans, Tom Nawrocki, Feb. 10, 2014