Can I transfer wealth to my kids and avoid taxes using a loan? Sometimes, but family loans can create tax surprises if they aren’t structured carefully.
High-net-worth families often want to help the next generation get ahead. A first home. A business opportunity. A way to move wealth while you’re alive and able to see the impact. That’s where family loans often enter the conversation.
But in 2026, interest-free or below-market family loans come with more complexity than many families expect. Higher interest rate environments, updated gift and estate limits, and increased IRS scrutiny mean good intentions can quickly create unintended tax consequences.
This article walks through the tax effects of interest-free family loans, common planning pitfalls, and where thoughtful coordination with your advisor matters most.
Family Loans vs. Gifts: Why the IRS Cares
At a basic level, the IRS draws a clear line between a loan and a gift. A true loan is expected to be repaid. A gift is not.
When families lend money to a family member without charging interest, or with terms that don’t resemble a real loan, the IRS will recharacterize part — or all — of the transaction as a gift. That’s where taxes and reporting requirements can surface.
For 2026:
- The annual gift tax exclusion is $19,000 per recipient ($38,000 for married couples who split gifts).
- The lifetime gift and estate tax exemption is approximately $15 million per individual.
Amounts above the annual gift exclusion don’t necessarily trigger immediate tax, but they do reduce your lifetime estate exemption and require proper reporting.
Interest-Free Family Loans and Imputed Interest
One of the most common questions we hear is: Can I give my kid a loan and avoid taxes?
The short answer: sometimes, but only if the loan is structured correctly.
The IRS publishes Applicable Federal Rates (AFRs) each month. These rates represent the minimum interest that must be charged on a family loan for it to be respected as a loan rather than a disguised gift.
If no interest, or below-market interest, is charged:
- The IRS will treat the forgone interest as a taxable gift. This is the difference between interest calculated at the AFR rate and the actual interest rate.
- The lender will be required to report interest income that was never actually received.
- There are exceptions for small loans: if the total outstanding loans to a borrower do not exceed $10,000, the imputed interest rules generally do not apply (unless the loan is used to purchase or carry income-producing assets). For loans up to $100,000, the amount of imputed interest recognized by the lender is limited to the borrower’s net investment income for the year, and if that income is $1,000 or less, no imputed interest is required to be recognized.
In a higher-rate environment, this issue is magnified. What once felt like a simple planning technique can now create ongoing reporting and tax friction.
Common Planning Pitfalls Families Miss
Family loans often fail not because of bad intentions, but because of informal execution. In many cases, large gifts require filing a federal gift tax return (Form 709). We see the same issues repeatedly:
- No formal documentation. Verbal agreements or vague notes invite IRS scrutiny.
- Unrealistic repayment expectations. If repayment isn’t expected, the IRS will assume it’s a gift.
- Charging no interest or below AFR interest. Using incorrect rates will create imputed interest.
- Pre-arranged forgiveness. Planning to forgive the loan later normally converts it into a series of taxable gifts.
For high-net-worth families, these missteps can quietly erode exemptions meant to be preserved for larger estate planning strategies.
When Family Loans Make Sense
Despite the risks, intrafamily loans can still be effective when aligned with broader estate planning goals.
They’re often used to:
- Help a child purchase real estate without commercial lending friction.
- Provide liquidity for a family business or investment opportunity.
- Transfer future appreciation on transferred assets when structured properly.
The key is coordination. Loans rarely exist in isolation. They interact with trusts, lifetime gifts, income tax planning, and long-term legacy goals.
The Role of Trusts and Complex Family Structures
Many high-net-worth families choose to make loans not directly to a family member, but to trusts designed to hold and manage assets long term.
Trust-based lending can add control, asset protection, and flexibility, but also complexity. Documentation, valuation, and administration matter more, not less.
This is where one-size-fits-all advice breaks down. Each family’s structure, asset mix, and risk tolerance is different.
Why Coordination Matters More in 2026
The question isn’t simply whether interest-free family loans work. It’s whether they work for your situation.
In 2026, families must balance:
- Higher interest rates
- Larger, but finite, lifetime exemptions
- Long-term estate and income tax exposure
- Family dynamics and fairness considerations
These decisions benefit from a coordinated approach that includes tax, estate, and wealth advisory perspectives.
How LBMC Can Help
At LBMC, our High Net Worth Division works with high-net-worth families and trusts facing complex financial situations. Our role goes beyond compliance.
We help families:
- Evaluate whether family loans align with long-term wealth transfer goals
- Coordinate lending strategies with trusts and estate plans
- Understand tax implications before, not after, transactions occur
If you’re considering a family loan or wondering whether an existing one still makes sense, now is the right time to revisit the conversation.
Talk with your advisor to ensure today’s generosity supports tomorrow’s legacy. If you don’t have a tax advisor, feel free to contact us — we’ll ask a few questions about your goals and complexity and let you know whether we’re a good fit.
Content provided by Amy Van Buren.
LBMC tax tips are provided as an informational and educational service for clients and friends of the firm. The communication is high-level and should not be considered as legal or tax advice to take any specific action. Individuals should consult with their personal tax or legal advisors before making any tax or legal-related decisions. In addition, the information and data presented are based on sources believed to be reliable, but we do not guarantee their accuracy or completeness. The information is current as of the date indicated and is subject to change without notice.