Intrafamily Loans
Financing the next generation while preserving the investment upside.
Not every wealth transfer needs to be a gift. Sometimes the better strategy is a loan. A parent may have substantial liquidity while an adult child needs capital for a home, a business, real estate or a portfolio. A trust or family business may need financing too.
Can one generation lend capital to another at an appropriate federal rate and let the borrower keep the return earned above that financing cost? Properly structured, an intrafamily loan provides legitimate financing while creating a potential multigenerational wealth-transfer opportunity.
A bona fide debt between family members
An intrafamily loan is a genuine debt arrangement between family members, or between a family member and a trust. The lender advances capital, the borrower signs a promissory note, and the borrower is legally obligated to repay principal and interest under the loan’s terms.
Parent → child
Grandparent → grandchild
Parent → trust for descendants
Family member → family investment entity
A loan is not a gift simply because the parties are related. But the transaction must actually operate as debt.
The borrower keeps the return above the financing cost
A parent lends an adult child $2 million at an illustrative 5%. The child invests it and earns 9%.
Contractual interest + principal
The economics of the note.
Performance above the borrowing cost
The 4% economic spread.
The transaction shifts the upside above the financing hurdle without the parent giving away the original $2 million. Illustrative figures only.
The rate depends on the term
Congress created special rules for below-market loans under §7872. The IRS publishes Applicable Federal Rates monthly, with separate rates for annual, semiannual, quarterly and monthly compounding. The note’s term generally determines which category applies.
October 2026 annual rates. Set the rate when the loan is implemented, not from an old estate plan.
The loan should be deliberately designed around its purpose, term, cash flow, interest rate and repayment schedule, rather than simply the lowest rate available.
An interest-free $1 million loan gives the child the free use of $1 million. Federal tax law does not ignore that benefit merely because the parties call it a loan. Under §7872, forgone interest on certain below-market and gift loans can produce deemed-transfer and income-tax consequences.
Treat the loan like a real financial transaction.
- Document it
- Charge an appropriate rate
- Set repayment terms
- Make the payments
- Keep records
Debt and other tax purposes
The rate most directly relevant when structuring an intrafamily term loan. October 2026: 4.25% / 4.61% / 5.22%.
Valuing annuities and remainders
Used for annuities, life interests, terms of years, remainders and reversions, and central to GRATs.
Related but not interchangeable. Different techniques have different hurdles.
A promissory note should be real
A one-page document left in a drawer for twenty years is not the model for sophisticated intrafamily lending. The note should address terms such as:
Family lending can be flexible. It should not be fictional.
A $5 million “loan” to a child with:
- No meaningful income
- No assets
- No repayment plan
- No collateral
- No realistic prospect of repaying
- No one expecting repayment
A reasonable expectation of repayment
- Borrower income
- Assets
- Investment cash flow
- Collateral
- Debt service
- Maturity
- Creditworthiness
Providing a child with $2 million
Transfer principal + future growth
- The parent transfers $2 million
- The child owes nothing back
- Uses annual exclusion and/or lifetime exemption as applicable
- All future appreciation belongs to the child
Keep the principal claim, shift excess growth
- The parent lends $2 million
- The child owes principal and interest
- The parent keeps the note as an asset
- The child keeps performance above the financing cost
The $5 million has not disappeared from the parent’s estate; it was exchanged for a note of equal face value. If the parent dies with the note outstanding, the note generally remains part of the estate.
An intrafamily loan is not an estate-tax elimination strategy. Its power comes from shifting future performance above the financing cost.
A parent lends a child $3 million, invested in a diversified portfolio, with an illustrative 5% loan cost and 9% long-term return. If the portfolio compounds faster than the loan, the child builds wealth from the spread.
The child keeps the spread
Returns above the 5% cost accumulate for the borrower.
The debt is still owed
The loan does not disappear because the investment underperformed.
Intrafamily loans transfer opportunity. They also transfer investment risk.
Homes, investment property, businesses and trusts
Real estate purchases
Instead of borrowing the full mortgage from a bank, a child may finance part or all of the purchase through a properly documented intrafamily loan.
- Flexible underwriting
- Customized amortization
- Competitive financing
- Interest stays in the family
- Estate-planning coordination
Advisers should still consider mortgage documentation, security, recording, state lending laws, property-tax consequences, interest deductibility, debt-to-income and refinancing provisions.
Estate planning does not eliminate real-estate law.
Investment real estate
- Parent lends $5M to the child
- Child acquires the property
- Property produces income and appreciation
- Child pays interest and principal to the parent
- Excess economics stay with the child
If total return materially exceeds the financing cost, the borrower can build substantial equity in productive assets.
Lending, not giving
A parent may lend capital for a child to buy or expand a business. The business generates the cash flow to service the debt, and the borrower owns any appreciation. The senior generation functions somewhat like a family bank while preserving accountability.
Parent → loan → trust for descendants
The trust invests the capital and owes the note; performance above the financing cost can accumulate for the beneficiaries. This resembles a sale to an IDGT, but begins with cash financing rather than selling an existing appreciating asset.
Both use debt to create a hurdle
Finance the acquisition or investment
Returns above the financing cost accrue to the borrower.
Finance the transfer of an existing asset
Appreciation above the financing cost accrues to the trust.
Both can be useful within the same family architecture.
An adult child carries a commercial loan at 8% while a parent holds cash earning significantly less. Refinancing could reduce the child’s cost, give the parent interest income and keep payments in the family. But it must make economic sense for both sides.
- Credit risk
- Liquidity
- Concentration
- Opportunity cost
- Loan security
- Estate planning
A parent should not make a financially irresponsible loan merely because it may produce a transfer-tax opportunity.
Loan structure should match asset duration
Balloon at maturity
For example, interest in years 1–9 and a principal balloon in year 9. This keeps the most capital invested during the term, but the borrower must eventually repay, and poor performance may force refinancing.
RememberTax efficiency should not replace credit analysis
Interest and principal
Each payment includes interest and principal, gradually reducing the debt. More conservative, but it returns capital to the lender sooner and leaves less invested by the borrower.
Choose byThe family’s actual economics
Payable when called
The lender can require repayment instead of waiting for a fixed maturity. Demand loans have their own §7872 rules and rate treatment. Flexible for the lender, uncertain for the borrower.
CautionIll-suited to long-term illiquid assets
Forgiveness, gifts and security
Forgiveness changes the transaction
If a parent lends $2 million and forgives $500,000 five years later, the forgiveness may be a gift. A loan should not be documented as debt while everyone privately understands it will never be repaid. Intended gifts should be planned and reported appropriately.
Separate transactions stay separate
A parent may make a bona fide loan and, separately, annual exclusion gifts the child could use toward payments. But the arrangement should not be circular or prearranged in a way that undermines the loan’s economic substance.
Not every intrafamily loan needs collateral, but security strengthens economic substance and protects the lender. Consider what a rational lender would require in similar circumstances.
- Real estate
- Business interests
- Investment accounts
- LLC interests
A $100,000 loan and a $20 million loan should not be documented with identical credit standards.
Capital that is allocated, invested, repaid and redeployed
For very wealthy families, intrafamily lending can become a disciplined system for deploying capital instead of repeated outright distributions.
- Education
- Home purchases
- Business formation
- Business acquisitions
- Real estate
- Investment opportunities
- Accountability
- Capital discipline
- Entrepreneurship
- Financial education
- Family governance
A family council or appropriate fiduciaries might set lending principles and evaluate each request:
How much money should the children receive?
How should family capital be deployed productively across generations?
Higher rates make asset selection more important
As of October 2026, the annual AFR is 4.25% short-term, 4.61% mid-term and 5.22% long-term. The hurdle for new intrafamily lending is materially different from periods when federal rates were close to zero.
The spread may not justify it
With financing above 5%, the margin may not cover the risk and complexity.
The economics can look very different
Substantially higher expected returns can make the spread worthwhile.
How lending changes with scale
$10 million family
Match sophistication to the problemA parent considers lending $500,000 to a child for a home. The objective may have little to do with federal estate tax. The benefits may be:
- Flexible financing
- Interest stays in the family
- Helping the child buy property
- Preserving parental principal
A simple, properly documented loan may beat an elaborate trust structure.
$25 million family
Moving future wealth- Investments
- Business
- Real estate
- Other assets
The parents lend $2 million to an adult child to buy investment real estate that appreciates significantly. They receive interest and eventual repayment; the child keeps the upside. Future wealth moves without an immediate $2 million gift.
$50 million family
Capitalizing the next generation$100 million family
A capital-allocation systemThe family might formalize a private lending program with underwriting standards, repayment policies and governance procedures. Capital might finance:
- Descendant businesses
- Real-estate acquisitions
- Trust investments
- Education
- Strategic family assets
- Entrepreneurial ventures
Intrafamily lending has evolved beyond a tax strategy into the family’s capital-allocation system.
When an intrafamily loan may not be appropriate
- The borrower has no realistic ability to repay
- The expected return does not justify the financing cost
- The lender needs liquidity
- Family dynamics make enforcement unrealistic
- Documentation will not be respected
- The parties actually intend a gift
- The investment is excessively speculative
- A commercial lender offers materially better economics
Family trust does not eliminate financial risk. Sometimes it increases it, because normal underwriting discipline disappears.
Can we make the loan at the applicable federal rate?
Does this use of family capital create enough value to justify the credit risk?
The family should ask:
- Why does the borrower need the capital?
- What asset will be acquired?
- What return is reasonably expected?
- Which AFR applies?
- How will interest be paid?
- How will principal be repaid?
- Should the loan amortize?
- Should it be secured?
- What happens if the investment fails?
- Will the family actually enforce the note?
- What happens if the lender dies?
- What happens if the borrower divorces?
- Would a gift be more appropriate?
- Would a trust be better?
- Would a commercial loan preserve healthier family relationships?
Are we making a real investment in the next generation, or disguising a gift as debt?
Intrafamily lending is evaluated as part of the family’s broader wealth-transfer and capital-allocation architecture:
Estate Tax + Gift Tax + Income Tax + AFR + Credit Risk + Investment Return + Real Estate + Business Succession + Trust Planning + Liquidity + Family Governance
The objective is not to charge the minimum permissible rate. It is to determine whether family capital can be deployed more intelligently across generations while preserving accountability and economic substance.
For larger families, capital is not simply inherited. It is allocated, invested, repaid and redeployed.
Family Limited Partnerships & Family LLCs
The intrafamily loan asks how capital should move between generations. The next page asks a different question:
How can a family consolidate business, investment and real-estate assets into one coordinated structure while separating management control from economic ownership?
- Family limited partnerships
- Family LLCs
- General vs. limited interests
- Voting vs. nonvoting interests
- Centralized management
- Business purpose
- Real estate
- Investment portfolios
- Valuation
- Marketability and control
- Gifting interests
- IDGT sales
- Creditor considerations
- Estate inclusion risk under §§2036 and 2038
- Governance and operating agreements
- Family investment entities
Book a Confidential Consultation
Discuss whether an intrafamily loan fits your family’s estate, business, real estate, insurance and multigenerational wealth strategy with ARH Global Advisors.