Intrafamily loan to help young adult child's business

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
Topic Author
HIinvestor
Posts: 1833
Joined: Tue Apr 08, 2014 3:23 am

Intrafamily loan to help young adult child's business

Post by HIinvestor »

We are planning to make an intrafamily loan to our S to help him in a growing, highly profitable business he is running. It will be interest only followed by a balloon payment of the entire amount of the loan in a year. The interest rate we have chosen is 0.4%, which is the best interest rate we can get at any of our current financial institutions. We trust S will promptly repay the loan and would be OK with gifting it to him or writing it off as a loss in the extremely unlikely event that he is unable to repay for any reason.

Alternatively, we could just outright gift half the amount and loan the other half for 2014 to stay within the 2014 annual gifting limits for H and myself. If he were unable to repay, for any reason, it would not jeopardize our financial security, but we believe it extremely unlikely he'd ever default. We want him to have the funding to further expand his inventory, as that's where he's investing his discretionary funds now.

Have drawn up a promissory note and sent it to him. Will have us all sign the notarized note before a witness when we see him in CA and give him the check.

Any thoughts?
User avatar
cheese_breath
Posts: 10069
Joined: Wed Sep 14, 2011 7:08 pm

Re: Intrafamily loan to help young adult child's business

Post by cheese_breath »

Normally loans to friends or family members are not a good idea because of the bad relations that could ensue if the loan isn’t repaid. But you seem to indicate there wouldn’t be a problem if your son failed to repay. (Actually this doesn’t surprise me. I think people tend to be more forgiving of their children than of other family members.)

I wonder about the interest rate you want to charge though. I read in another thread there could be tax consequences if you charged below the going rates for similar type loans. I’m not sure of the details so maybe someone else can chime in with more information.

I wonder if it might be OK to charge him the standard rate and then gift back the difference between that and your 0.4% after he repays the loan. Maybe someone else could comment on that too.
The surest way to know the future is when it becomes the past.
Jack FFR1846
Posts: 13053
Joined: Tue Dec 31, 2013 7:05 am
Location: 26 miles, 385 yards west of Copley Square

Re: Intrafamily loan to help young adult child's business

Post by Jack FFR1846 »

Where can he get a 0.4% loan from? I get 0.85% interest from my fully insured credit union limited withdrawl account with $25k minimum in place.

The same credit union lends for cars at 1.24%. I'd think that would be more reasonable and more easily justified to the IRS.

If the amount is below the gift, I would say to just gift it to him and tell him that whatever he wants to pay back, including nothing... is fine with you.
Bogle: Smart Beta is stupid
User avatar
cheese_breath
Posts: 10069
Joined: Wed Sep 14, 2011 7:08 pm

Re: Intrafamily loan to help young adult child's business

Post by cheese_breath »

Jack FFR1846 wrote:Where can he get a 0.4% loan from? I get 0.85% interest from my fully insured credit union limited withdrawl account with $25k minimum in place.
I think OP is saying he can earn 0.4% interest at his current institution, so he would like to charge his son the same. That way he would earn the same, and his son would get a cheap loan.
The surest way to know the future is when it becomes the past.
SimonJester
Posts: 2224
Joined: Tue Aug 16, 2011 12:39 pm

Re: Intrafamily loan to help young adult child's business

Post by SimonJester »

If you could gift him the money why would you not just do that? Why have a financial obligation hanging over his head, it just adds stress to a relationship. Even if it would cause you no harm to just end up gifting the loan if he could not repay it, what does it do for your son, how much guilt would he have if something came up and he could not repay? It may be no consequence to you if he has to default but it might be to him. All of that goes away if you just gift the money from day 1.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin
User avatar
HardKnocker
Posts: 2063
Joined: Mon Oct 06, 2008 11:55 am
Location: New Jersey USA

Re: Intrafamily loan to help young adult child's business

Post by HardKnocker »

I wouldn't gift him the loan upfront.

He should expect to repay it. This is what a responsible adult does. A little sweat makes Jack.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
Topic Author
HIinvestor
Posts: 1833
Joined: Tue Apr 08, 2014 3:23 am

Re: Intrafamily loan to help young adult child's business

Post by HIinvestor »

The IRS has a federally adjusted AFR (applicable federal rate) tables which show the rates for short term (1-3 year), medium term 4-9 year) and long term 10+ year) loans each month, Revenue Ruling 2014-13 Table 2. The may 2014 annual APR under the table is short term .33%, medium term 1.41% and long term 3.27%. I chose .4% interest! as it's the best rate we can get in a money market or other investment where the funds will be held for a year or less at this time.

We got the 0.4% interest rate because it's slightly above the 0.33% short term rate on the IRS AFP table for May 2014 and is a rate we could earn if we preferred to put our money in the credit union money market account, which is the other place we could park those funds. If we didn't charge interest, the iRS would impute interest, so we prefer to put a mutually acceptable interest rate in the promissory note instead.
harmony
Posts: 558
Joined: Sun Nov 24, 2013 1:35 am

Re: Intrafamily loan to help young adult child's business

Post by harmony »

If I had more than just one child and I were to loan/give money to any one of them before I die, I would make efforts to ensure that after I am gone, the other children would feel that they had each been treated fairly.

My father made a plan to engift each of his children a certain amount before he died. Some of us borrowed money from our father and later paid it back with fair interest. If we had not paid the money back before he died, the outstanding loan was to have been subtracted from the planned gift. Those who started businesses received all their funds. Not all of us chose to accept the gift before he died. Either we didn't need it or we wanted our father to have it for his long-term care. In his will he made provision for each of the children who had not yet received their gift to receive it before the remainder of his estate was distributed. The plan seemed very fair to us. The probate lawyer sorted out whether the child or the estate was responsible for paying taxes on distributed earnings. Another issue was that the older our father got, the less able he was to get a guaranteed return on certain accounts.

The gift tax laws allow double to be given if both husband and wife give a gift. Or if one parent is giving a gift, double can be given if it goes to separately to each of a married couple. It can reassure the parent to know the funds will end up in a joint account. If it is done on December 31, another gift can be given on January 1. The last provision can be combined with one of the others.
Slowmaha
Posts: 138
Joined: Fri Feb 21, 2014 7:00 pm

Re: Intrafamily loan to help young adult child's business

Post by Slowmaha »

HIinvestor wrote:The IRS has a federally adjusted AFR (applicable federal rate) tables which show the rates for short term (1-3 year), medium term 4-9 year) and long term 10+ year) loans each month, Revenue Ruling 2014-13 Table 2. The may 2014 annual APR under the table is short term .33%, medium term 1.41% and long term 3.27%. I chose .4% interest! as it's the best rate we can get in a money market or other investment where the funds will be held for a year or less at this time.

We got the 0.4% interest rate because it's slightly above the 0.33% short term rate on the IRS AFP table for May 2014 and is a rate we could earn if we preferred to put our money in the credit union money market account, which is the other place we could park those funds. If we didn't charge interest, the iRS would impute interest, so we prefer to put a mutually acceptable interest rate in the promissory note instead.

Bingo, consult your tax professional, but I think you're set. You've covered the AFR, you have it in writing, and you have your expectations settled. I don't really see the problem with intrafamily loans/investments as long as it's done right, communicated properly, and all legal/tax boxes are checked. I hope it works out!
PS241
Posts: 41
Joined: Wed Jan 02, 2013 10:49 pm

Re: Intrafamily loan to help young adult child's business

Post by PS241 »

Why not be an investor in the business instead? You take the risk - you get the reward? I once worked at a restaurant that was started by an 18 year old kid with some help from his dad. Fast forward 30 years and it is a successful chain with over 200 locations. Dad is still getting nice checks due to that original investment (and a generous son) even though original investment has been payed back many times over.
Topic Author
HIinvestor
Posts: 1833
Joined: Tue Apr 08, 2014 3:23 am

Re: Intrafamily loan to help young adult child's business

Post by HIinvestor »

Yes, when S is ready to expand, we do hope to invest in his business. It's still a very profitable hobby for him right now and we are happy to help him grow while he holds his full time job. He could benefit from the funds now bad probably will repay in January. If we invested with him, I think it would be pressure that we don't want to apply.
Post Reply