The WSJ had a recent article by Laura Saunders titled How Families Can Beat 7% Mortgage Rates and Lower Their Tax Bills. The subtitle is “Having relatives who trust each other opens the door to tax-efficient wealth sharing.” In this economy? Saunders definitely grabbed our attention.
The crux of the article is that well functioning households can help themselves with intrafamily loans, asset transfers, and in some cases, disclaimers. “Well functioning” is interesting, as we note the criticality of good family communications and running the Business of the Family like a business. Let’s explore these three areas a bit further.
If feasible, an Intrafamily Loan provides reasonable rates for the Next Generation while Mom and Dad earn the monthly income. Don’t pay the bank, pay Mom and Dad, and keep the whole flow of money within the family. Genius, right? There are some critical safeguards that need to be saluted:
- Documentation - Both parties need an agreement which outlines the terms so no one can rewrite history
- Transparency - This loan agreement needs to be as accessible as traditional bank loan documentation, it’s part of the estate accounting
- Interest Rate - “To avoid IRS trouble, the interest rate shouldn’t be lower than the agency’s Applicable Federal Rate at the time of the loan. Currently that is about 5% for loans longer than nine years; about 4.5% for loans three to nine years; and about 4% for loans three years or less. Currently, traditional mortgage rates are generally above 7%.”
- Taxes - “The lender owes tax on the interest, and the borrower often can deduct it if he or she itemizes.”
- Forgiveness - “The lender could use the $19,000 annual gift-tax exemption to forgive some or all of the interest or principal annually. If both lenders and borrowers are married, that is up to $76,000 a year. There is no tax for the borrower on such forgiveness, because it is from a gift.”
Asset Gifts are another possible way for the family to help itself. Current law provides for $19,000 of assets to be gifted annually. “That means a married couple with three grandchildren could give them a total of $114,000 in 2026. The gifts can be cash or other assets, like stock. For noncash gifts, the cost basis—which is the starting point for measuring taxable gain after a sale—“carries over” to the recipient.”
Gifts are just that: Mom and Dad cannot put restrictions on what the Next Generation does with the gift. Knowing that, we repeat the caveat that this is for well functioning families. But Mom and Dad could fund a 529 Plan or a Roth IRA or other dream. This support is critical and helps preserve family legacy.
Disclaimers happen when a widowed spouse “disclaims” the right to an asset, such as an investment account or insurance policy beneficiary, so that the Next Generation can claim the proceeds. It’s a bit technical when this applies, but it’s worth noting as a concept.
All of the above should be done with the supervision of a tax professional (and we are not one!). We do provide the ability for a family to identify assets, document Intrafamily Loans, alert you when it might be a good idea to explore these options, and connect you to professionals as needed. Automatically. Systematically. Without you needing to do the heavy lifting. You can help your family. We can help your family. We can move ourselves forward…