As we continue to plan for our clients, we want to highlight one positive side effect of the market turmoil, the decreasing applicable federal rate (AFR). In May, the AFR for a short-term loan (<3 years) will be .25%, for a mid-term loan (3-9 years) it will be .58%, and for a long-term loan (>9 years) it will be 1.15%.

You may be asking yourself what is the AFR and why should I care? The AFR is the minimum interest rate for intrafamily loans. For some families, these low rates may allow one family member or a family entity to alleviate another family member’s debt service. On a $500,000 mortgage at a 4.00% for 30 years, the monthly payments are $2,387.08 with total interest paid being $328,873.73. If that interest rate changes to 1.15%, the monthly payments become $1,642.88 with the total interest paid being $84,950.37. Under this scenario, if a senior generation can lend the younger generation the $500,000 to refinance their mortgage, the younger generation can save over $700 a month and approximately $240,000 over thirty years.

Some of you may be asking if the senior generation could simply gift the $500,000 to the younger generation. Yes, this transfer could also be structured as a gift. There is no Washington gift tax, and the Federal estate/gift tax exemption is currently $11.58 million per person. With depressed values due to market turmoil, now is a great time to for gifting. By making a gift at the depressed values, the donor is using less of his/her gift tax exemption. If the recipient can wait to liquidate the gifted assets until after the market rebounds (it always does), the recipient gets the benefit of the higher values and the donor got the benefit of the lower values when making the gift.

For anyone considering an intrafamily loan or a sizeable gift, now may be the time to act. Of course, any intrafamily loans and gifts needs to be considered in conjunction with other elements of financial plans and estate plans.

If you are interested in discussing intrafamily loans, gifting or other questions about estate planning, we are here to help.