Banks are criticized for inadequate loans and for
making too much profit. While some of these claims are dubious, there is one
bank that undeniably offers very low-interest rates with potentially high loan
capacity: Mother and Father Bank.
Lending money to children, both teenagers, and adults,
is a valuable way to increase family wealth, provide opportunities and avoid
burdensome gift and inheritance taxes. With both interest rates and asset
values low, now is a good time to consider low-interest family loans.
Under the current law, 2010 does not have a land tax.
However, in 2011, the release rate will return to the 2001 level of $ 1
million. So, even though inheritance tax is no longer applicable, you don’t
have to rely on a tax that remains that way.
The amount that you can pass to heirs tax-free before
your death is also limited. Each year, an individual taxpayer can give only a
limited amount to any other individual (including their child) without having
to report the gift. For 2010 the cap is $13,000. Gifts beyond that amount count
toward a lifetime limit on tax-free gifts, set at $1 million. Prizes above the
$ 1 million lifetime exception will be subject to the gift tax. In 2010 the
highest prize tax rate was 35 percent.
Family loans offer a way to reduce or avoid this
inheritance gift and tax. It works like this: A parent gives a loan to a child,
which can then be invested by the child, who tries to earn more than the annual
interest he pays. If the parent had invested the money directly, those gains
would belong to that parent and could potentially be subject to estate or gift
tax when passed on to the child. Instead, using the loan strategy, the excess
rate of return goes directly to the child, or a trust for the child’s benefit,
with no gift taxes.
Free to Charge just The
The Internal Revenue Service sets a minimum interest
rate that individuals must charge for a loan not to be categorized as a gift.
This rate, known as the Applicable Federal Rate, changes monthly based on
prevailing market interest rates. Most financial institutions charge much more
than this, but the Bank of Mum and Dad is free to charge just the minimum.
Since this rate is currently low, and asset values are also down, a child who
receives a loan from his parent at the minimum rate should have little difficulty
investing the money at a net profit.
Several Choices for the Family
Children have several sound choices for their family
loans. They may use borrowed money to buy investment securities, to buy a
private residence or investment property, or to buy all or part of a family
One option is a portfolio of diverse investment
securities, which, although volatile, generally have high rates of return over
a long period of time. The Federal Rate that applies in August 2010 for a
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