Are Intra-Family Loans a Smart Choice?

 Posted on December 04, 2015 in Estate Planning

It is not uncommon for parents to provide financial assistance to their adult children for major purchases, such as the purchase of a new home. Moreover, the amount lent to an adult child may be dependent on his or her financial circumstances. However, one option that many families are considering is intra-family loans.

The rising popularity of these loans may come from the lack of higher-interest bearing savings accounts that most financial institutions offer. For parents whose money would be sitting in an account that is only earning approximately 1.5 percent interest, the lending of funds to be used as a mortgage to their adult child, and the earning of 4 percent interest, is a much more attractive proposition.

For an adult child, an intra-family loan can offer lower interest rates than what the lending institutions offer. Utilizing an intra-family loans can also help to avoid the often large down payments that lending institutions additionally require before they approve a mortgage. An adult child is still able to claim the interest he or she is paying to their parents on their income tax, as well. In addition, this interest "stays in the family"—either spent by the parents or it is eventually inherited by the adult child. None of it goes to a bank or mortgage company like traditional mortgage interest does.

Intra-family loans are also being used to pay for college tuition instead of traditional student loans. Interest rates on federal student loans can average between 5 and 7 percent. Student loans from private lending institutions have interest rates almost double the federal loans. However, grandparents can offer intra-family loans at an approximately 2 percent interest rate—again, a win-win situation for everyone.

There are issues to consider regarding whether or not an intra-family loan should be utilized—it is important that the loan does not create any financial hardship for either parents or adult child. Still, whatever the terms that may be decided, it is a wise idea to have an attorney involved in the intra-family loan process, especially since it may affect other aspects of one's estate. Please contact an experienced DuPage County estate planning attorney today for more information.

Sources:

https://www.cfainstitute.org

http://blogs.wsj.com/totalreturn/2012/07/30/borrowing-from-family-to-pay-for-college/

https://studentaid.ed.gov/sa/types/loans/interest-rates#what-is-interest