Intrafamily loans also can be used to help with Medicaid eligibility. Applicants for the program are often in danger of being disqualified because they own certain nonexempt assets, which they can't transfer to someone else without a penalty. But the applicant may be able to lend those assets to a family member as long as a promissory note is drawn up and it complies with the rules established in the Deficit Reduction Act of 2005. The federal government is concerned less about the interest rate on the note than about the amount and term of the loan.
"With the right client and in the right hands, an intrafamily loan may be the difference between someone getting Medicaid benefits and not getting them," Asher says.
Whether for good planning or good parenting, loans to relatives can be pretty risky for many reasons, not the least of which is that money is an emotionally charged topic for a family. It's a proxy for other things. Parents can use it to show love, generosity or control, and children who accept it may feel beholden, like they lack independence-not the type of feelings they have when they borrow from a bank.