Lending Money to Family? Do This or the IRS Calls It a Gift

An intrafamily loan lets you act as the bank for your child, charging the minimum interest rate the IRS allows and keeping the interest within the family. As of September 2026, you can lend $1 million to your child at 4.49% for 9 years. If your child would otherwise borrow at, say, 6.5%, that saves them roughly $20,000 a year.

Structure matters, though. If you charge no interest, or everyone knows from the beginning that you do not expect to be paid back, the IRS may treat it as a gift. This article covers the required rate, two exceptions, forgiving interest, when these loans fit, and the paperwork.

The minimum interest rate on a family loan

The minimum rate you can generally charge a family member is the Applicable Federal Rate, or AFR. The IRS publishes it monthly in three tiers. For September 2026, using annual compounding:

• Short term (3 years or less): 4.18%
• Mid term (more than 3 and up to 9 years): 4.49%
• Long term (over 9 years): 5.12%

Rates change monthly, but a term loan generally locks in its rate for life.

Charging less puts you into Section 7872, which covers below market loans. The IRS can calculate the interest you should have charged and treat the difference as a gift to the borrower while also treating it as interest income to you.

The $10,000 and $100,000 exceptions

Under the $10,000 de minimis rule, if the total outstanding between you never exceeds $10,000, the below market loan rules generally do not apply, unless the loan is used to purchase income producing assets.

Under the $100,000 rule, if the total outstanding is $100,000 or less, imputed interest is generally limited to the borrower's net investment income, and if that is $1,000 or less, it is treated as zero. Limits apply, including when tax avoidance is a principal purpose. Above $100,000, the simplest answer is to charge at least the AFR.

Why an intrafamily loan can be an estate planning tool

Say you lend a child, or a trust for a child, $1 million at the mid term AFR and they invest it and earn 7%. You receive 4.49%, and the return above that belongs to them. Over time, that excess compounds outside your estate without a gift of the original $1 million.

It is similar in some ways to a GRAT, where you transfer the return above a government set hurdle rate. One important difference is that the note itself is still an asset in your estate.

Forgiving the interest with annual exclusion gifts

In 2026 the annual gift tax exclusion is $19,000 per recipient. A married couple could each give $19,000 to one child, $38,000 in total, or give to both a married child and their spouse for $76,000. A $1 million loan at 4.49% generates about $44,900 of interest a year, so a married couple lending to a married child has enough annual exclusion to offset the entire economic cost of the interest. Two cautions:

• You still report the interest income. You are receiving the interest and then making a separate gift back.
• Forgiveness should not be part of the original deal. If everyone agrees from day one that the payments will never really be made, the argument that this was a legitimate loan weakens.

Create a real promissory note with real repayment terms, have the borrower make the payments, then separately decide whether to make a gift, and document those gifts separately.

When a family loan makes sense

• Helping a child buy a home. If the loan is properly secured against the property and recorded, the interest may potentially qualify as deductible mortgage interest for the borrower.
• Funding a business when traditional financing is expensive.
• Buying out a sibling's interest in inherited property, which might prevent a forced sale.
• Bridging a liquidity need, such as a tax bill, a capital call, or a period between jobs.
• Shifting future appreciation when your estate is above the federal estate tax exemption, $15 million per person in 2026.

You can sometimes refinance an existing family loan when AFRs fall, though I would involve an attorney to make sure the refinancing does not create an unintended gift.

The downsides, and when not to lend

The interest is taxable income to you, even if you give it back. The note remains an asset in your estate, so the principal has not left. There is ongoing administration. And lending $1 million to one child and nothing to another can create issues well beyond taxes, so think about how it fits the broader estate plan and how you communicate it.

I would be very careful if you need the money back to support your own lifestyle or if your child realistically cannot make the payments. If what you really want is to make a gift, it may be better to just make a gift.

Intrafamily loan documentation checklist

1. A written promissory note, signed and dated.
2. An interest rate that meets the applicable AFR.
3. A repayment schedule with specific dates.
4. Collateral when appropriate, such as a recorded mortgage for a home loan.
5. Payments that actually happen, with a paper trail.
6. Interest income reported on your tax return.
7. Evidence the borrower could repay when the loan was made.
8. No side agreement, written or verbal, that the loan will be forgiven.

Common questions

What interest rate do I have to charge on a loan to a family member?

Generally at least the Applicable Federal Rate, which the IRS publishes monthly in short, mid, and long term tiers. For September 2026, the mid term rate was 4.49%.

Can I forgive the interest on a loan to my child?

Potentially, using annual exclusion gifts of up to $19,000 per recipient in 2026. You still report the interest as income, and forgiveness should not be part of the original deal.

What happens if I lend money to family with no interest?

Under Section 7872, the IRS can treat the interest you should have charged as a gift to the borrower and as interest income to you. Loans that never exceed $10,000, and some loans of $100,000 or less, may have little or no practical tax consequence.

VDB Wealth is a registered investment adviser. Information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Past performance is not indicative of future performance.

Right now, the IRS will let you lend a million dollars to your child at 4.49% for nine years. That's the minimum rate you're required to charge.

There's no bank involved. No underwriting. No points. No appraisal.

If your child would otherwise have to borrow that money at, say, 6.5%, you're saving them roughly $20,000 a year in interest. And instead of that interest going to a bank, it stays within the family.

But you do have to be careful about how you structure it.

If you charge no interest, or if everyone knows from the beginning that you don't actually expect to be paid back, the IRS may not view it as a real loan. They may view it as a gift.

So in this video, I'm going to walk through the rate you need to charge, a couple of important exceptions, how annual gifting can work alongside a family loan, when these loans make sense, and the paperwork you need to get right.

Who I am and what we'll cover

Quick introduction. I'm Andy VandenBerg, founder of VDB Wealth, a boutique registered investment adviser where I work with founders, executives, and private equity professionals.

A big part of my work is helping families think through how money eventually moves from one generation to the next. And intrafamily loans can be a really useful tool for doing that.

They're also pretty easy to mess up.

So here's what we'll cover: the interest rate you're required to charge, two exceptions worth knowing about, why these can actually be useful for estate planning, how annual gifting can work with the loan, when I think these make sense, and how to document everything properly.

The rate you have to charge

Let's start with the interest rate.

The minimum rate you can generally charge a family member is called the Applicable Federal Rate, or AFR.

The IRS publishes these rates every month, and there are three categories.

Short term is three years or less.

Mid term is more than three years and up to nine years.

And long term is anything over nine years.

For September 2026, using annual compounding, the short term rate is 4.18%, the mid term rate is 4.49%, and the long term rate is 5.12%.

Those rates change every month, so you always want to check the current AFR before putting a loan in place.

One nice feature, though, is that once you make a term loan, you generally lock in that rate for the life of the loan.

The issue comes when you charge less than the AFR.

That puts you into Section 7872, which covers below market loans. Essentially, the IRS can calculate the interest you should have charged and treat the difference as a gift to the borrower while also treating it as interest income to you.

So you can end up owing tax on interest you never actually collected.

That's why getting the rate right matters.

The two exceptions

There are two exceptions that are worth knowing.

The first is the $10,000 de minimis rule.

If the total amount outstanding between you never exceeds $10,000, the below market loan rules generally don't apply. One important exception is when the loan is being used to purchase income producing assets.

The second is the $100,000 rule.

If the total amount outstanding is $100,000 or less, the amount of interest that can be imputed is generally limited to the borrower's net investment income.

And if their net investment income is $1,000 or less, it's treated as zero.

So if you make a relatively modest loan to a child who doesn't have much investment income, there may be little or no practical tax consequence from charging a below market rate.

There are some limitations here, including if tax avoidance is one of the principal purposes of the loan.

But once you get above $100,000, the simplest answer is pretty straightforward: charge at least the AFR.

Why this can be an estate planning tool

This is where family loans get a little more interesting.

Saving your child money on interest is the obvious benefit.

But let's say you lend a child, or potentially a trust for a child, $1 million at the mid term AFR.

They invest that money and earn 7%.

You're receiving 4.49% on the loan. But the return above that belongs to them.

If that continues over time, that excess return is compounding outside of your estate without you having to make a gift of the original $1 million.

That's what makes this an estate planning strategy and not just a cheaper way for your kid to borrow money.

It's similar in some ways to the concept behind a GRAT, which I cover in another video. You're essentially transferring the return above a government set hurdle rate.

There are obviously differences. One of the important ones is that the note itself is still an asset in your estate.

Forgiving the interest

This is probably the question I get most often.

If I have to charge my child interest, can I just give that money back to them?

Potentially, yes.

Every year, you can make gifts up to the annual gift tax exclusion. In 2026, that's $19,000 per recipient.

So if you're married, you and your spouse could each give $19,000 to one child, for a total of $38,000.

If your child is married, you could potentially each make gifts to both your child and their spouse. That gets you to $76,000 of annual gifting.

Now compare that to a $1 million loan at 4.49%.

That loan generates about $44,900 of interest each year.

So in the example of a married couple lending to a married child, there's enough annual exclusion available to offset the entire economic cost of that interest.

But there are two really important things to understand.

First, forgiving interest doesn't make the interest income disappear for tax purposes.

You still have to report the interest income. You're essentially receiving the interest and then making a separate gift back.

Second, you don't want the forgiveness to be part of the original deal.

If everyone agrees from day one that your child is never really going to have to make these payments, you start weakening the argument that this was a legitimate loan in the first place.

So keep the loan and the gifts separate.

Create a real promissory note with real repayment terms. Have the borrower make the required payments. Then separately decide whether you want to make a gift.

And document those gifts separately.

You want the facts to support what you're saying happened: you made a legitimate loan, and you separately decided to make gifts.

When an intrafamily loan makes sense

So where might this actually make sense?

One common example is helping a child buy a home, especially if they can't get attractive financing from a bank.

You essentially become the bank. And if the loan is properly secured against the property and recorded, the interest may potentially qualify as deductible mortgage interest for the borrower.

Another example is funding a business, particularly when traditional financing is expensive or requires terms that don't make sense.

It can also work for buying out a sibling's interest in inherited property, where a family loan might prevent a forced sale.

Or it can simply bridge a legitimate liquidity need, a tax bill, a capital call, or a period between jobs.

You can also sometimes refinance an existing family loan when AFRs fall, although I'd have an attorney involved to make sure the refinancing itself doesn't create an unintended gift.

And then there's the estate planning use case.

If you have an estate above the federal estate tax exemption, which is $15 million per person in 2026, shifting future appreciation to the next generation can become pretty valuable.

Any return above the AFR that accrues to the next generation is growth that is no longer happening inside your estate.

When they don't make sense

There are downsides.

First, the interest is taxable income to you. So even if you ultimately give that money back to your child, you still have income to report.

Second, the note itself remains an asset in your estate.

You may have shifted future growth, but you haven't magically removed the principal from your estate.

Third, there's ongoing administration.

You need to keep track of payments, report the interest, document gifts, and generally treat this like the real financial transaction that it is.

And then there's the family side of this.

If you lend a million dollars to one child and nothing to another, that can create issues well beyond taxes. You need to think about how this fits into the broader estate plan and how you communicate it to the family.

There are also situations where I simply wouldn't use a family loan.

If you need the money back to support your own lifestyle, I'd be very careful.

If your child realistically can't make the payments, that's a problem.

If what you really want to do is make a gift, it may be better to just make a gift.

And if enforcing the loan after a default would create a major family problem, you should think about that before the money ever leaves your account.

The documentation checklist

If you're going to do this, the documentation matters.

Ultimately, the question is whether this is a legitimate loan.

You want a written promissory note that's signed and dated.

You want an interest rate that meets the applicable AFR.

You want an actual repayment schedule with specific dates.

When appropriate, you may want collateral. If this is a loan for a home, for example, that could mean recording a mortgage against the property.

You want payments to actually happen and you want a paper trail showing them.

You need to report the interest income on your tax return.

You also want evidence that the borrower had the ability to repay the loan when it was made.

And you don't want a side agreement, written or verbal, that says the loan will eventually be forgiven.

None of those things are particularly complicated or expensive.

But they go a long way toward establishing that this was actually a loan.

Close and call to action

So that's the basic idea.

An intrafamily loan can be one of the simpler ways to help the next generation financially, and in the right situation, it can also be a useful estate planning tool.

But you need to treat it like a real loan.

Charge at least the applicable federal rate. Put the terms in writing. Make the payments. Report the interest. And if you decide to make gifts along the way, keep those gifts separate from the loan itself.

Do that correctly, and you can potentially move future growth to the next generation without using much, if any, of your lifetime gift tax exemption.

If you're thinking about lending money to a child or a trust and want a second set of eyes on how you're structuring it, feel free to reach out. I'm always happy to talk through it.

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