Copyright 2011, Marc S. Weissman
Weiss & Weissman, San Francisco, California
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FAMILY LOANS

This Article is designed to be of general interest. The specific techniques and information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.

One of the best ideas ever:

Loans must carry the IRS minimum interest rate or they have adverse tax consequences.

Each month the IRS issues rates for all loans made during that month.  IRS issues rates based on the duration of the loan.  A loan of 3 year duration is subject to the short-term rate; loans of more than 3 year but not more than 9 years use the mid-term rate; loans of more than 9 years must use the long-term rate.  These are minimum rates - the IRS does not issue maximum rates.

The rate comes out about the 20th of the month before it takes effect.  Here are rates for loans signed in those months:

Term: Short-Term Mid-Term Long-Term
October, 2011   0.16%   1.19%   2.91%
November, 2011   0.19%   1.20%   2.64%
December, 2011   0.*%   1.*%   2.*%

2 very simple techniques:

1)  Generous, wealthy Parents lend money at the minimum rate to their adult children to pay off the Bank mortgages on the kid's home / rental property.  This boosts the cash flow for the kid who now pays 'sweetheart' rates instead of Bank rates.

A twist on this is that the Parents can use their annual gifting to reduce the loan balance by $13,000 per year if they desire.  A few of my clients do this.  Most are not that nice.

Mary helped her daughter buy a home.  Mary did not want to get a mortgage - it would be an all-cash purchase in July, 2011.  Daughter and Husband signed a mortgage to Mary for the entire cost of the property: $700,000.  The minimum interest rate was very attractive: 0.37% per year for 3 years or less.  The total annual interest was less than $2,600.  Our plan was to 'roll it over' at the end of 3 years and whatveer the IRS minimum rate was then.  But the next month the rate dropped for all loans made in August, so we changed our deal to the new rate (and locked in 3 years at that rate).  Of course, sign new papers as soon as we get into October to lock that rate for the next 3 years.  HOW LOW CAN IT GO???

2)  Parents are go-getters, and already wealthy, but they cannot stop - they are always looking for a new deal to make more money.  When they die, they will have even more money in their estates and their kids will owe estate tax.  Consider:  Parents set up the new deal in a way they can use their money to fund it (maybe through loans at low interest) but the profits go to the children / grandchildren / Trusts for the Children, etc.

Ana is very wealthy, mostly in real estate.  She and her husband bought and bought.  When she dies, $15,000,000 may be taxable.  But she is not ready to die.  In fact, she just found a heck of a deal - the property next door to her old building is for sale, and she can make another million.  Then when she dies she will be taxed on $16M instead.

My idea was that Ana should buy the new building in her Grandchildren's' names, because Ana does not need an extra million and it will save tax when Ana dies.  There are several ways to do this.  It can be in an LLC where Ana owns 1% (and has 100% control); the grandchildren's share will be held in Trust managed by their Mom to keep the funds under control.  Or Ana can skip the LLC if she does not mind giving control to her daughter as Trustee of the Grandchildren's Trust

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