Loan Agreement for a family member - Hammerle Finley Law Firm

During the Years of Plenty, when you could simply throw money into the air and have it return three-fold, intra-family loans were a rarity.  

Ah, but that was before the dawning of the year of Coronavirus.  Nowadays family loans are depressingly common, often being the only buffer between economic survival and pandemic- inspired bankruptcy.   

If you find yourself lending money to a family member, there are some points to keep in mind.  

The IRS is Watching.   It is not just your paranoia – the IRS has stringent tax rules about family loans and it will not be shy about penalizing you.  The IRS requires that you charge, and collect, interest on your intra-family loan.  Happily, the interest rates are at historic lows.  For May, 2020, the annual rates for loans lasting more than 9 years is 1.15%, for loans from 3 to 9 years it is .58%, and for loans less than 3 years the rate is .25%.  These are minimum fixed rates – you are free to charge more than the minimum rate.  The IRS rules primarily apply to loans that are greater than $15,000 per individual, unless you try to take a deduction for bad debt when your family member does not pay you back.  

Gift vs. Loan.  A valid question that deserves some analysis.  You can gift an individual $15,000 per year without having to file a gift-tax return.  Even if you gift more, the overage will only count against your life-time exemption.  For 2020 the combined gift and estate tax exemption of $11.58 million per individual, and a whopping $23.16 million per couple.  But be careful, because this large exemption goes away in 2026.

If you make a gift, then the deemed interest problem goes away.  However, you have no right to demand or expect that the gift will ever be repaid. 

Emotion Matters.  Money is business; family is emotion.  Together they are combustible.  Do not loan money without a plan to handle your family borrower’s default, divorce or death.  You will also need a plan to handle the emotions of other family members – a loan or gift to only one child could cause a lot of resentment in the remaining children.

Consider a Combination.  For the best of all worlds, consider making a loan and then forgiving $15,000 (or $30,000 if the loan is to a couple) a year as a gift.   Make sure you write down how you are handling it, and whether you are promising to make gifts until the entire amount is forgiven.  

Paper, Paper and More Paper.  Your bank would never lend you money without a promissory note.  Neither should you.  The note should be in writing and state the principal, loan date, rate, term, repayment schedule and default clauses.  If there is collateral, then that needs to be in writing and “perfected,” which means taking steps to give notice to third parties.  

Estate Planning.  Your estate planning documents should contain instructions to your executor about how you want the loan handled when you die.  If you want the loan forgiven, then you might consider equalizing distributions to your other beneficiaries in the same class.  Check with your CPA for possible tax ramifications.

Virginia Hammerle is a Texas attorney whose practice includes estate planning, guardianship and probate. Sign up for her newsletter at Contact Hammerle Finley Law Firm to schedule a consultation at

This column does not constitute legal advice.