Donald Trump’s recently released tax returns show he received interest from his children Ivanka, Eric and Don Jr. for several years. Although the purpose of the loans isn’t disclosed, advisors can use the news item to launch discussions with the ultra-wealthy about the potential benefits of intra-family loans.
“Very few clients are aware of the rules,” says estate planner Steven J. Oshins, managing partner of Oshins & Associates LLC in Las Vegas. A key requirement for loans topping $10,000 is that the lender must charge at least the applicable federal rate (AFR), which is fixed for the life of the loan, to help avoid possible income tax and gift tax consequences. There are different AFRs for loans of different lengths, with the rates around 4% for loans executed in January. New rates are published monthly by the IRS.
It’s essential to turn to an experienced attorney who can draft a note to make sure the loan is an arm’s-length transaction. For example, some of Oshins’s clients make interest-only loans to their children, and when the lender passes, the children use part of their inheritance to repay the principal to the parent’s trust or estate.
Because the AFR is typically below bank rates, family loans are often used to provide capital to loved ones for purposes ranging from building a home to starting or expanding a business.
If clients are nervous about estate taxes, perhaps because today’s $12.92 million per-person estate tax exemption is scheduled to drop by roughly half in 2026, a loan can remove future growth from their taxable estate. This is accomplished if the borrower invests the loan proceeds in a hot investment or business opportunity that appreciates faster than the AFR.
For example, back when the AFR was below 1%, Oshins says, “One of my multibillionaire clients loaned roughly $50 million to a trust I had set up for his descendants a number of years earlier.” Say the trust assets return 7% this year. After paying interest to the lender, more than 6% in this example—over $3 million—stays in the trust, outside the client’s estate.
This is essentially an asset-location strategy for families who view themselves as “a collective investment unit looking to place the potentially more highly appreciable piece of the family portfolio out of the estate of the lender,” explains Ajay Sarkaria, a Denver-based regional vice president of advanced planning for Fidelity Investments. However, a potential disadvantage for the family is that they possibly lose the step-up in basis that the assets would have received had they remained in the lender’s estate.
The lower the AFR, the better, obviously, and now that it has risen along with other interest rates, some clients “feel like they missed the boat,” Sarkaria says. “We emphasize to them that the AFR is nowhere close to its historic highs. That seems to give them some comfort.”
Other families loan to the next generation as a pilot test, to gauge how the future heirs manage a sum smaller than their inheritance will be. Then they set the estate plan accordingly. For instance, a client who discovers that their heir lacks financial maturity might dole out the inheritance gradually over time. On the other hand, if an heir thrives with the loan, the client may leave a less-encumbered, if not outright, inheritance and perhaps provide additional support during the client’s lifetime, Sarkaria says.
A client can also use these loans to help transfer a private business. In this case, the founder would sell his or her interest in the enterprise to a family member in exchange for a note. The buyer would then typically pay the seller interest and make a balloon payment for the principal at the end of the loan term, says Lisa R. Featherngill, Comerica Bank’s national director of wealth planning, in Winston-Salem, N.C. These cases typically involve mid-term notes, meaning they mature in three to nine years. However, the AFR for longer loans has recently been nearly identical to the mid-term rate, she says, so clients can lock in a rate for a longer term at virtually no additional interest cost.
A family loan is rarely the cornerstone of an estate plan. So Sarkaria says it’s the advisor’s responsibility, and opportunity, to explain to clients “how the technique fits into the overall family dynamic and financial plan, and it emphasizes the need for working with a financial advisor.”