Personal Wealth Law News

The IRS has announced the rates of interest used in valuing gifts and other transfers for the month of July, and they have fallen again. This means that transfers to the next generation can be made at a lower cost in gift tax exemption. But here’s something else affected by these lower rates: intra-family loans. An individual can lend money to a child or grandchild, for example, for a period up to just under three years, and charge interest at the rate of .61%. That means that a loan at that rate will not be considered a gift. How does this work? The person who receives the loan invests the money and earns some rate of return. To the extent that the rate exceeds the required loan rate of .61%, the borrower gets to keep the difference, and that can be substantial if the loan is big enough. The difference is not considered a gift to the borrower, which makes the intra-family loan an effective technique of transferring assets without worrying about the gift limitations in the Internal Revenue Code.