With mortgage rates hovering near 7%, families are turning to intra-family lending and trust arrangements to lower tax burdens and reduce borrowing costs. By lending money to relatives at below-market interest rates, households can avoid high bank rates while shifting income to lower-bracket family members. This strategy, often facilitated by private trusts or family limited partnerships, can significantly cut tax liabilities.
The IRS allows loans between family members at a minimum interest rate called the Applicable Federal Rate (AFR), which is much lower than mortgage rates. When structured properly, these loans can generate interest deductions for the borrower while the lender pays tax on the interest income—often at a lower rate. Wealthy families are increasingly using these tools to preserve assets across generations.
However, experts warn that improper structuring can trigger IRS scrutiny or gift tax consequences. Legal and tax advisors recommend formal agreements, documentation, and compliance with IRS rules to avoid penalties.
Source: Wall Street Journal Markets · Summarized by HeadlinesBriefing