Should I Loan Money To Family Members?

Hi there. I’m Bridget Mackay. I’m an attorney in Petaluma, California, and I practice in wills, trusts, and estate planning, probate, and trust administration.

Today my blog is on “should you loan family money?” Short answer, it’ll be a a quick blog, no. But it often happens against your better judgment. What are some of the things you can do to protect yourself and ensure the proceeds are returned and your relationship with that family member stays harmonious?

You need to consider IRS rules and stay within them, number one. First, the IRS expects you to charge interest for amounts over $100,000 that you loan, even to a family member. They will require you to include interest in your return whether you charged it or not. For references to acceptable interest, see the IRS website and look for the applicable federal rate or also known as the AFR.

Second, a loan under $14,000 is considered a gift by the IRS and no gift taxes would apply. If you do a loan under that amount, you’re probably okay with the applicable federal rate or something lower. Loans between $14,000 and $100,000, if the interest in less than the AFR though, the difference will be considered a gift and may subject you to pay gift taxes for that year depending on what your lifetime exemption has already taken into consideration.

Number four. There are ways around these tax consequences, of the IRS stepping in and making you pay interest, if you structure the loan in an irrevocable trust. If you are loaning money to a family member, always document that loan. Don’t let it be verbal. You want to document that loan in several ways. You can do it with a signed promissory note from the borrower, or in a trust, whether it’d be irrevocable or revocable.

If you’re still thinking of loaning your family money after seeing this blog, always, always, always consult a qualified estate planning attorney, so that they can advise you on the best process in which to set up that loan.

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