Intrafamily loans are a useful financial tool for helping adult children purchase real estate, invest in a business, or pay off high-interest debt. When interest rates were at historic lows, these loans made a lot of sense. With mortgage rates still double 2021 levels, it’s worth revisiting whether intrafamily loans are still practical. Before deciding to lend money to a child, parents should weigh both the financial and relational implications.

Financial Implications: The Numbers Still Work. Financially, the case for intrafamily loans remains compelling. This week, a 30-year mortgage is 7% for those with 740-760 FICO scores. In contrast, the IRS allows family members to loan money at the Applicable Federal Rate (AFR) without triggering tax penalties. The January 2025 AFR for long-term loans is 4.44%. This is a competitive bond like yield for the lender while a terrific yield advantage for the child.

Relational Considerations: Proceed with Care While the numbers may make sense, lending money within a family can be emotionally complex. To minimize potential misunderstandings, these are some basic considerations:

• Put Everything in Writing: Be clear in the loan agreement. Specify the repayment schedule (include an amortization), due dates, late payment penalties, and consequences for non-payment.

• Consider Relationship Dynamics: Reflect on whether you are prepared to enforce the loan terms in the event of non-payment.

• Should you secure your loan? While filing a lien on the property for which the loan is made may offer some additional “protection”, it also may interfere with traditional mortgage underwriting.

Other considerations It is important that you evaluate the following:

Evaluate Long-Term Impact: Think about how lending money might affect your own financial goals and retirement plans. Do not compromise your own financial security.

• Understand IRS Implications: Family loans are subject to additional IRS scrutiny. If your child cannot make payments, you may be required to: a) pay income tax on unpaid interest; and/or b) treat the unpaid portion of the loan as a taxable gift.

• Consult Advisors: Work with financial and tax professionals to structure the loan properly and ensure compliance with IRS regulations.

As housing affordability declines, intrafamily loans remain a practical financial tool. However, careful planning, clear communication, and professional guidance are essential. If you are considering an intrafamily loan, discuss your options with your Tanglewood advisor to help determine whether it is the right choice for your situation.

Many people put their estate planning on the back burner. Sometimes it is just because it is a topic they don’t want to think about. But often it is because they are conflicted about who to put in charge of their estate when that time comes.

We encourage our clients to go deep when naming an executor. In addition to a primary, it is a good idea to name two or more back up persons in case the primary executor is unwilling or unable to serve. Typically, clients name their spouse as primary executor, followed by one or more of their children as successors. In most cases, this should suffice. However, in more complex estates, family or friends may not be the best way forward. For example:

• The spouse maybe unwilling or unable to handle the complexity.

• Adult children and friends are either too far away or they may lack the basic skills needed to do all that is required.

• Friends also may be too close to your age to be relied upon.

The Independent 3rd Party Executor

If you are facing this dilemma, consider naming (and hiring) someone outside of your circle of family or friends to serve as your executor. Look for individuals with previous experience acting as a third party executor for estates with a similar level of complexity as yours. You may want someone with a key skill set, such as expertise in accounting or business operations.

Different Ways to Serve

These individuals work two ways. The most obvious is being named in your will as your primary executor. (Your executor may hire one or more third parties to assist the surviving spouse with an estate with many moving parts.) For instance, this outside person may take the lead on winding down a business operation, dividing and distributing trust assets, and/or overseeing the sale of real property, etc.

Independent executors charge in a variety of ways, from a flat fee to an hourly fee with a retainer to assist the estate over a period of months or years.

Although an independent third party will add a layer of expense to your estate, we believe naming an experienced person(s) may be the best for your beneficiaries.

If you are thinking of selling your residence in 2024, it is good to keep in mind the capital gains considerations before you put it on the market.

As mortgage interest rates continue to drop, we anticipate a pickup in both home buyers and home inventory in 2024. For the past 18 months, anyone with a <4% mortgage on their home has not been keen on moving to a new house with a 8+% mortgage, unless it is out of necessity. As mortgage rates continue to decline, the gap between the new and existing mortgage rates is decreasing.

Personal exemption

The IRS gives a sizeable capital gains tax exemption for the sale of a primary residence, if certain conditions are met. For instance, homeowners may take an exemption of up to $250,000 (single filers) and up to $500,000 (married filing jointly). The exemption is available to those who meet two conditions: 1) they owned their home at least two years and 2) they lived in that home (as their primary residence) for at least 2 of the 5 years prior to the sale.

Exemption example

A married couple purchased their primary residence in 2015 for $800,000. They have lived in the home continually since purchase and made $200,000 of improvements. If they net $2,000,000 from the sale after selling costs, their gain on the home sale is $1,000,000. Since they owned their home at least 2 years and lived in it for more than 2 of the past 5 years, the IRS allows them to reduce their taxable capital gain from $1,000,000 to $500,000.

Caveats and considerations

While many homeowners meet the basic requirements listed above, there are other caveats. The capital gains exemption can only be used once every two years AND for one home at a time.

With the notable appreciation in home values since Covid-19, this exemption can significantly reduce your tax bill in the year of the sale.

Additionally in Texas, beginning at age 65, the school portion of your property tax is capped. If you purchase and move to a new home, you do not have to start over. Instead, your over 65 exemption ratio from your previous home is portable and can be applied to your new homestead. Typically done at closing, you will want to make sure you fill out a county appraisal district form to elect your new home as your homestead.

As always, talk with your advisor to discuss how this may apply to your particular situation.

Disclosures

“Congratulations! You’ve won the grand prize.” How would you react to a call or an email saying this?

Fraudsters relentlessly try to separate people from their money. Retirees (especially those living alone) are the most vulnerable. This article addresses common schemes shared by clients and how to respond. Take and share these with ones you love who may be susceptible to these scams.

“Easy money” schemes

Did you even enter? If you don’t remember entering a lottery or sweepstakes, you probably didn’t. Don’t second guess yourself. Be skeptical.

Do not send them anything of value. If you really win a big prize, you do not need to prepay taxes, pay a processing fee, or send them gift cards.

No personal data. Do not provide your social security number or date of birth over the phone. Fraudsters may also ask for bank account information under the pretense of getting the “prize money” to you safely. Do not give it to them! This same information can also be used to steal money OUT of your bank account.

Money mule scams. This is where someone is used to launder and transfer stolen money. If someone sends you money and then asks you to send it to someone else, don’t walk, run away.

Legitimate companies. Scammers often spoof legitimate companies like Publishers Clearing House (PCH). PCH representatives will not call or email you if you win. When in doubt, go to the company’s official website or ask a trusted contact to do so on your behalf. It may save you a small fortune.

Keep the family informed. It is best that you tell your family or trusted contact about these alleged windfalls as soon as possible. Thieves discourage people from telling anyone so they can “surprise” their family later. Don’t keep it a secret.

“You owe them” schemes

According to AARP, in addition to fake prize scams, government impostor scams are on the rise. These scams involve people who claim to be from the IRS, Social Security, Medicare or the FBI. The government will not call you and ask for personal information they already have. You do not need to wire money, send a check, or mail a gift card to avoid arrest or having your account suspended.

The Federal Trade Commission (FTC) website (https://consumer.ftc.gov/features/scam-alerts) is a good resource to learn about current scams.

Feel free to call your Tanglewood advisor if you or someone you love receives a suspicious communication about an alleged sweepstakes prize.

Disclosures

Tanglewood has long espoused the benefits of Revocable Living Trusts (RLT). An RLT allows you to transfer ownership of your assets into it while maintaining control over those assets during your lifetime.

Benefits of an RLT include:

• Avoids probate

• Flexibility and control

• Privacy

• Continuity of management

This article focuses specifically on the importance of including all real property (including your home) into an RLT.

Unlike a will that requires involvement from the probate courts, an RLT allows a successor trustee to immediately step in to make management decisions on the property without delay.

If you have an RLT, fund it

Many people who have a living trust never retitle their real property into it. If this is you, keep in mind the executor of your will cannot transfer property from your estate to your RLT until after the probate court names them as executor, something you wanted to avoid in the first place.

This is especially important for clients who own property in more than one state as probate in certain states (e.g. California) are more cumbersome than in others. Retitling out of state real property into an RLT will not only avoid the time and expense of ancillary probate, but it allows for continuous management of these assets.

Putting your residence and other assets into an RLT today saves time and resources later. As many people age, they risk potential incapacity and/or dementia; making it much more difficult to retitle assets.

Contact your insurance agent

Finally, after you retitle your real property into an RLT, contact your insurance agent to discuss adding the trust as an “additional named insured” on both your homeowner’s and umbrella policies. If a home is damaged by fire or flood, the individual persons have an insurable interest in the home contents, but the living trust technically has an insurable interest in the structure. If the trust is not also added to the policy, it is possible the insurance company will pay the claim on the contents, but not on the structure.

Disclosures