The Financial Planner

The Family Bank

How can you help your children or other family members with large purchases? One solution could be the intra-family loan. Intra-family loans are a way to help children or other family members finance major purchases at an advantageous interest rate, and transfer or preserve wealth with a minimum of tax consequences for you or your heirs. While these loans can be quite helpful, it is important to remember is that this is an actual loan—not a gift. The borrower must pay the loan back.

Lower Interest Rate

Intra-family loans usually have a lower interest rate than standard loans, providing a potential to save thousands of dollars. Loans between related parties can use the “applicable federal rate” or AFR in accordance with Section 1274(d) of the Internal Revenue Code. The AFR is different for different maturities: short-term (three years or less), mid-term (more than three and up to nine years) and long-term (more than nine years).1 The actual rates are updated monthly and can be found on the IRS website here:

Loan Structure

It is necessary to demonstrate that the money given to the family member is really a loan because otherwise the IRS will assume it is a gift. To prove this creditor-debtor relationship, you can use the following items:2

  • Signed promissory note kept on file.
  • Predetermined repayment schedule is put in place.
  • A fixed interest rate is used for the loan—at least equal to the AFR for the month in which the loan is made.
  • Collateral is requested from the borrower.
  • Repayment of the loan is required.
  • Records are kept of payments made:
    • Family lenders should have a form 1099 prepared to show the interest income they received.
    • For mortgage interest, family lenders should issue a form 1098 to the child to show the amount of interest paid. The child can use this to deduct the mortgage interest if they itemize.
  • Borrower is solvent.
  • No plan to forgive the loan.

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The Financial Planner

The "Disclaimer." Just Say No?

Receiving an inheritance can be an emotional, exciting, and even life-changing event. But what if you don’t want to accept it? There are situations when accepting an inheritance may not be in your best interest, or not what you want for yourself. Our legal system provides us with a simple and straightforward way to say “no” to an inheritance: the disclaimer. We have the right to “disclaim” or turn down an inheritance (or a specific asset within an inheritance), as long as we follow the rules.

What is a Disclaimer?

The dictionary definition is a “formal refusal to accept an interest or estate.”1 In order for someone’s refusal to accept an interest to become a “qualified disclaimer” (meaning the IRS will not treat the asset as yours for tax purposes), it must meet the following requirements as paraphrased:

  1. The disclaimer is in writing (notarized) and delivered to the person controlling the estate (such as the executor or trustee) within nine months of the death or nine months after turning 21 if the inheritor is a minor.
  2. The person disclaiming has not accepted the interest or any of its benefits.
  3. The disclaimed interest passes without any direction by the person disclaiming, to either the decedent’s spouse or a person other than the person making the disclaimer.2

The writing must be very specific as to what you are disclaiming and follow all the rules (see 26 U.S. Code Section 2518). If you plan to disclaim but receive any part of the inherited interest, even briefly, it will be considered your asset.

How Does the Disclaimer Work?

When you disclaim an inheritance, you cannot stipulate where the asset or interest goes. The interest will pass on to the next heir according to the will, trust, beneficiary designation or intestate succession laws as though you did not exist.

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The Financial Planner

Welcome to the Financial Planner Blog!

Welcome to The Financial Planner blog!  I will be sharing financial planning ideas and strategies with individual investors. If you find this information pertinent, I will have succeeded in my mission. I will also help keep you informed when laws change and new planning ideas come to the fore.  At Allodium, we want you to know about smart strategies for your money.

The team at Allodium wanted me to share a little bit about how I came to be in the financial planning and investments business. It really came down to bad advice, or I should say, no advice. I was a single working woman for many years with no real clue about my money. I engaged investment advisors and I paid for financial plans more than a few times.  Do you think these folks paid any attention to my real need for sound financial advice? Unfortunately, they did not. They put me in some investments that paid them a commission or fee and moved on to the next client. I remember having to track them down every year just to have a conversation about my investments.

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