In this low interest rate environment, some financial planners are advising their clients to cut the middleman out entirely with intra-family loans.

That way, "the bank's profit stays in the family," Jonathan Bergman, a financial advisor in Scarsdale, N.Y., says. In most cases, such loans are made to a child from a parent. A parent, confident of a son's or daughter's ability to repay, can make a higher return through an intra-family loan than they often can through stocks or bonds. For the younger generation it means they are able to borrow at a lower interest rate than those offered by a financial institution.

Cameron Thornton, a financial advisor in Burbank, Calif., who specializes in inter-generational wealth transfers, says one of his clients recently used an intra-family loan to enable a daughter to buy real estate abroad.

"The loan itself generated a percent and a half higher than the idle cash flow would have sitting in a money market at the time," Thornton says. The loan was originated by a family limited partnership in order to enable the daughter, who holds dual U.S. and German citizenship, to buy property. In this instance, the loan helped the daughter avoid prohibitively high interest rates in Germany.

First-time borrowing, financing business startups and the purchase of investment properties are all ideal ways to use this strategy now, according to Thornton. "It really just depends on what the overall objective is," he says.

However, Thornton cautions that the loans must be written using interest rates established by the federal government for short-term, mid-term and long-term periods to ensure the loan rates are not considered "under-interest" by the IRS.

Mary Anne Heyman, a planner in Fort Collins, Colo., has not advised clients to originate intra-family loans, but some of her clients have taken it upon themselves to do so. "As long as everyone is aware of the risks, then it's something to consider. Some families will be fine with it," she says. "Other families don't roll with the punches quite so well." She adds that a planner should be clear as to who their client is—parent or offspring.

Often, the loans are forgiven if a lending parent dies. One of Thornton's clients died in his 90s with two loans outstanding to two children. The loans originated from a business transaction that generated a tax bill too high for the children to cover. Making those loans enabled the offspring to benefit from the transaction anyway. After the father's death, the loans disappeared as part of the inheritance process, Thornton says.

Intra-family real estate loans can also get appreciation out of the estate after the parent passes away, Bergman says. "Instead of paying gift or estate taxes on your future appreciation; with the loan, the excess return goes directly to the child or a trust for the child's benefit," he says.

Many people who don't have a federal estate tax problem are surprised to learn they will be subject to state estate taxes, Bergman says. "And today's big federal estate-tax exemption may be a temporary reprieve. It's scheduled to go back to $1 million in 2013."

Although only estates exceeding $5 million for individuals and or $10 million for couples pay federal estate tax, many states levy estate or inheritance taxes on much smaller amounts, the planner said. In New York and Massachusetts, for instance, the estate tax kicks in at $1 million.

To write an intra-family loan for real estate, a lawyer should draw up a formal mortgage and promissory note, Bergman says. And the borrower should obtain adequate homeowner's insurance, just as a bank would require.

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