Family Loans: Should You Lend It or Give It Away?

August 8, 2022
Be sure you know what you're getting into before you agree to a family loan.

It may be better to give than to receive—but what about to lend?

Many well-off individuals choose to extend a helping hand to family members, be it a down payment on a new home, a bridge loan when times turn tough, or even an advance on an inheritance. But how they give can be as consequential as how much.

That's because of the potential tax implications that depend on whether such financial assistance comes in the form of a family loan—to be paid back at a later date, with interest—or an outright gift. And while loans are often seen as furthering financial discipline, gifts may be less likely to foster conflict because—by definition—they often come without formal strings attached.

So, which method is right for your family and under what circumstances? Start by considering the following.


Gifts of $16,000 or less per recipient fall under the annual "gift exclusion" for tax purposes. If your gift exceeds that amount, you must report it to the IRS on Form 709. That doesn't necessarily mean you'll owe taxes on it, thanks to the lifetime gift tax exemption, which is the total amount you can give away tax-free during your life. 

The current gift and estate tax exemption for 2022 is $12.06 million per individual (U.S. residents only) under the Tax Cut and Jobs Act (TCJA). This amount is indexed for inflation through December 31, 2025, when it would decrease by 50% under current law.

"If you have significant means, and you're primarily concerned with your tax exposure, then it may be prudent to give money or other assets to family members before this window closes, and clients should be meeting with their attorneys now," says Chris Borzych, a Schwab wealth strategist in San Antonio, Texas. In addition, if you have appreciable assets that have decreased in value, you may want to consider gifting them now rather than later. In doing so, any future appreciation would occur in the recipient's estate.

"For many individuals, estate taxes haven't been a concern with the high $12.06 million exemption, which is effectively doubled for a married couple," Chris explains. "With the likely reduction of these exemptions in 2026, making transfers out of one's estate will become a significantly more important planning strategy for us all."

Furthermore, in November 2019, the IRS issued final regulations to the TCJA that provided a special rule allowing the taxpayer's estate to calculate the estate tax credit using the higher of either the basic exclusion amount of gifts over a lifetime or the current exemption amount at the time of the taxpayer's death. Therefore, taxpayers who take advantage of the increased exemptions before 2026 don't have to worry about losing the tax benefit of the higher exclusion levels if they're reduced. But recently, the IRS has sought to limit these "anti-clawback" rules. It is imperative that you speak with a qualified tax consultant to fully evaluate this exemption planning.

Gifts are simply outright transfers of assets during your life with annual exclusions and the added benefit of lifetime exemptions. Sometimes, individuals may expect the recipient to pay back the money, want to earn income from an asset, or have even exceeded their lifetime gift exemptions. When this is the case, then gifting your money may not be the right answer.


For those who don't want to give an outright gift, an intrafamily loan—which can encourage fiscal discipline in the form of regular repayments—is another way to go. "A family loan can provide support for family and income for the lender," Chris suggests. 

Before you extend a loan to family, however, be aware that it's not as simple as just writing a check. The IRS mandates that any loan between family members be made with a signed written agreement, a fixed repayment schedule, and a minimum interest rate. (The IRS publishes Applicable Federal Rates (AFRs) monthly.) 

"There are many strategies that take advantage of the difference between the relatively low AFR rates, which are currently around 3.35% for long term (See "All in the Family," below), and the earnings rate a portfolio could potentially earn over time. This may allow a gift and estate tax-free transfer of wealth to family," Chris says. 

Should you fail to charge an adequate interest rate, the IRS could tax you on the interest you could've collected but didn't. What's more, if the loan exceeds $10,000 or the recipient of the loan uses the money to produce income (such as using it to invest in stocks or bonds), you'll need to report the interest income on your taxes.

There's also the question of delinquency to consider. When a family member can't repay a loan, the lender rarely reports it to a credit bureau, never mind a collection agency. However, should the lender want to deduct a bad loan on her or his taxes, the IRS requires proof of an attempt to collect the delinquent funds. 

Conversely, if the lender wants to forgive the loan, the unpaid amount will be treated as a gift for tax purposes. Then, the borrower may owe taxes on the remaining unpaid interest. (The rules are even more complicated if the loan is considered a private mortgage, so it's best to consult a qualified tax advisor or financial planner before finalizing the details.)

"You should not attempt to disguise a gift as a loan," Chris warns. "An intrafamily loan needs to have a formal structure or else the IRS will consider it a gift. This may be a significant issue if you've already used your lifetime gift exemption and, if so, may trigger an immediate tax. 

"With the current unified estate tax and gift tax exemption limits of $12.06 million, this is often not an issue. But when the gift tax exemption is lowered in 2026, this could be significantly more problematic," Chris cautions.

Be that as it may, lending a large sum to a family member can help her or him save a tidy sum in interest payments over the life of the loan.

All in the family

Intrafamily loans, which can be offered at rates lower than those for mortgage and personal loans, can help borrowers save big on interest.

Intrafamily loan Mortgage Personal loan
Loan amount $100,000 $100,000 $100,000
Interest rate 3.35%1 4.74%2 10.60%3
Loan term 15 years 15 years 15 years
Total interest paid $27,357.04 $39,916.88 $100,089.17

For estate-planning purposes, you might consider using an intentionally defective grantor trust (IDGT) along with a large intrafamily loan, especially if the beneficiary is your child or grandchild. Don't be thrown off by the name. The defect is a tool used to allow greater family transfers by taking advantage of the differences in income tax law and gift and estate law. 

With an IDGT, you can transfer assets to the trust by gift or sale. Gifting an asset could trigger a gift tax on any capital gains. On the other hand, selling an asset can be structured as a loan where you could charge a low interest rate. You won't owe taxes on the interest income, and the assets will grow tax-free. You must, however, continue paying taxes on all income produced by the IDGT each year. The trust assets won't be included in the value of your estate, thus lowering your taxable estate and allowing your beneficiary to avoid gift taxation.

Using an IDGT in conjunction with an intrafamily loan is complex. Seek the advice of an estate planning attorney, and reach out to a Schwab wealth strategist to determine if this strategy is right for you.

Family dynamics

In the end, whether to give a gift or extend a loan may come down to the strength of your familial relationships and the nature of the individuals involved. "When developing the right strategy for unique family situations, individual circumstances must be recognized," Chris says. "Both gifts and loans have a purpose and should be used in an overall strategy. Often, strategies use both to accomplish a client's wealth-transfer goal."

Whichever path you take, communication is key, particularly when setting expectations.

This information does not constitute and is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, Schwab recommends consultation with a qualified tax advisor, CPA, financial planner, or investment manager.

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