Desperate small business owners looking for cash to keep their businesses alive during the coronavirus pandemic are turning to their families for loans. Loans with ultra low interest rates are a lifeline. “People risk their own money for their siblings, children, grandchildren,” says Rebecca MacGregor, estate planning lawyer at Bowditch & Dewey in Boston, Massachusetts. She recently set up intra-family loans for clients trying to keep a gas station, a third-generation Italian restaurant and a fifth-generation insurance agency. “No one is singing the praises of the family and friends who save these small businesses,” she said. “They are unsung heroes.
How frequent is this intergenerational generosity? An overwhelming 71% of retirees said they would offer their family financial support needed due to Covid-19 even if it could jeopardize their own financial future, a recent retirement study by Edward Jones and AgeWave found.
The Internal Revenue Service announces special interest rates (Federal Applicable Rates or AFR) monthly, and for August, by IRS Income Decision 2020-15, here’s how low they are:
Short term – Three years or less: 0.17%
Medium term – More than three years and less than nine years: 0.41%
Long term – More than nine years: 1.12%
“You can’t get these rates from a bank! The rates are incredibly low, but the risk is incredibly high. That’s the nature of a family loan, ”says MacGregor.
Some business owners first got loans from the CARES Act Paycheck Protection Program, and now they are turning to family members. “P3 loans are a band-aid and aren’t enough, and that’s only if you can get a loan,” says MacGregor. Families lend money to keep businesses afloat in hopes that once Covid-19 has passed, customers will come back.
The restaurateur got an $ 80,000 loan from his parents in June, and now he’s back for another tour. “When do you keep investing and when do you give up? It’s a really tough conversation for these families, ”says MacGregor.
For the lender, it is important to consider how much you are comfortable giving. Do you have enough savings for your life? Do you want to combine a loan and a donation? You can give anyone $ 15,000 per year with no tax impact on donations. A couple could give a child $ 30,000.
An intra-family loan is a private loan, instead of a loan through a known bank lender, but if it is over $ 10,000, you need the same type of documents as for a bank loan. These are real loans, meant to be repaid. You can make the loan interest only, or make it an interest and principle payment. You can structure it so that the lender is part of the principle. If you stay under the $ 15,000 / $ 30,000, you don’t need to file a tax return. If the donation is greater, you file a donation tax return and use your lifetime donation tax exclusion ($ 11.58 million per person).
Intra-family loans also work well for real estate purchases. MacGregor has a few families where the older generation helped the younger generation buy a dream vacation home outside of town. Now, with the coronavirus, they want to get out now. A couple made a $ 1 million $ 1 million loan combo to help their San Francisco-based daughter buy a $ 2 million Colorado home. The girl put in $ 200,000. With the couple’s net worth being between $ 10 million and $ 20 million, so they were comfortable reducing their estate, knowing that the federal inheritance tax exemption is expected to drop back to $ 5 million (adjusted for take inflation into account) in 2026.
With small business loans, they are usually short term, so families get the lowest short term rate. With larger dollar amounts involved in home loans, MacGregor says most clients lock in rates in the medium to long term. If you go for a family member’s lowest rate short term loan and have to refinance it in three years because you can’t pay it back, you are risking the applicable interest rate at that time. -the.