Reply to First world problem alert, advice on large loan from family

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[quote=Anonymous][quote=Anonymous][quote=Anonymous][quote=Anonymous]OP here. It is all kind of informal - we are basically borrowing from a pot of money designated for future inheritance and working with siblings (one member of older generation is still around but not interested in dealing with money matters). I guessing if rates drop the family members would allow us to "refinance". The other siblings have or have been offered similar deals to buy homes so it is a bit of an honor system.

As far as pre-payment, would we be allowed to or could we afford to? I am sure if we wanted to write a big check towards the loan every so often no one would stop us.[/quote]

This sounds like a disaster.  Is this honor system really going to hold together for 40 years?[/quote]

I guess no way to know but I hope so? Siblings wanted to give us the money flat out with no interest involved, [b]money manager guy had to step in and say that we had to have interest for tax reasons[/b]. Sibs also have taken loans from the pot of money.[/quote]

So in that case, and I'm not an attorney or estate expert, the IRS has minimum interest rates you must charge for family loans like this.

https://www.irs.gov/businesses/small-businesses-self-employed/section-7520-interest-rates

For May 2023 that rate is 4.20%

I have some experience with family loans like this and the situation in which we "charge" a minimum interest rate is to avoid the gift counting towards your lifetime gift tax exemption. And I put charge in quotes because we don't actually pay the interest, the debt is instead written down by $60k year (or whatever the maximum annual gift is between one couple and another), less the minimum interest charge. But if your money is in a trust or the total estate is less than $22 million or so then you don't have to mess with this.

Anyway, if you're charging interest for tax reasons you need to have an agreement in writing. You may trust your siblings, etc but the IRS is going to want something written down - even if it's just a simple letter outlining terms.[/quote]

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