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Advantages of intra-family loans

Loaning money within a family can always be a complicated proposition, but proper legal guidance can help make intra-family loans an effective option for wealth transfer and keep them from becoming points of contention in personal relationships. In certain circumstances, such loans and notes have clear legal advantages over other forms of wealth transfer.

Often a member of a family has a credit history that disqualifies him or her from securing a traditional loan from a lending institution. In this case, an intra-family loan can be the best option for directing needed resources to a family member who would otherwise be unable to access them.

In many cases, acquiring a loan from a traditional lender may include significant closing costs and other associated fees and costs. An intra-family loan with well-defined terms is almost always capable of circumventing all or most of these costly extra fees.

Intra-family loans are practically and legally distinct from gifts, and therefore entail interest payments like any other traditional loan. However, such loans can benefit the family as a whole by keeping both the initial wealth transfer and subsequent repayment between family members, precluding a bank or other traditional lender from receiving the interest payments and taking money out of circulation within the family unit.

Another, slightly more complicated advantage, is arbitrage. In simple terms, if an individual uses an intra-family loan to purchase property or assets which has an initial or appreciation value greater than value of the loan plus the subsequent interest (such as real estate that appreciates significantly above purchase price), there can be a wealth transfer that is more favorable than a simple gift with fewer tax implications.

As with any significant transfer of wealth, there are always many seemingly small complications, both legal and interpersonal, that can cause enormous frustration if not prepared for properly. The guidance of experienced and qualified legal counsel can help negotiate these complications and help the whole family reach the best possible outcome in any wealth transfer scenario.

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Bingham legal group

30100 Telegraph Road, Suite 360
Bingham Farms, MI 48025

Phone: 248-952-8783
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