Wealth Planning Insights
Wealth Planning Insights | Is a Family Loan the Right Wealth Transfer Strategy for You?
Keith Fenstad, CFP®, April 2025
The Great Wealth Transfer is already underway. Sometimes it takes the form of carefully structured estate plans and inheritances. More often, it is through the Bank of Mom and Dad.
Parents are choosing to pass down wealth during their lifetime, actively supporting their children’s financial journeys. Many are stepping in as lenders, providing assistance when it’s needed most. They arrange intrafamily loans to help their children buy homes, start businesses, and invest in their future. This quiet shift is reshaping how wealth moves between generations, and it comes with both opportunities and risks.
More families are choosing to transfer wealth during their lifetime, often in the form of low-interest or no-interest loans. It allows them to:
Provide financial help when their children actually need it.
Avoid some of the red tape, underwriting headaches, and high interest rates that come with traditional lenders.
Retain some control over the money while still supporting their kids' financial independence.
We often work with parents to define the structure and terms for these loans. There are agreed-upon interest rates and repayment periods, just like any other structured financial agreement. But unlike a loan with a financial institution, a family loan can pull double duty as a lower-stakes gauge of a child’s financial health, or a gift that is forgiven over time.
A Loan Today, a Gift Tomorrow
Many parents approach these loans as a way to start wealth transfer while still maintaining flexibility. They lend money at a low IRS-determined interest rate. If the loans are below that threshold they are potentially looked at as gifts. Children benefit from market growth in excess of the loan rates, keeping the wealth transfer tax-efficient.
For example, a parent might loan a sum of money to their child at a low fixed interest rate. The child reinvests that money and the long term growth stays with the child, outside of the parent’s estate. Over time, the parents may further forgive portions of the loan, effectively turning it into a tax-advantaged gift.
That said, parents need to be financially secure themselves before making these kinds of arrangements. The first priority in any wealth transfer discussion is ensuring that parents won’t jeopardize their own retirement by being too generous too soon.
The “Training Wheels” Strategy for Heirs
Another common reason families choose to lend first, rather than gift outright, is to test financial responsibility. Some parents worry about how their children will handle a sudden influx of money, especially if they haven’t managed large sums before.
Many of our clients use gifts or loans to fund investment accounts to introduce their heirs to wealth management. If a child mismanages the money, it gives parents time to reassess before passing down more significant assets.
We have found this approach also helps to introduce your children to the idea of working with a financial advisor. The hands-on guidance of an advisor creates an extra layer of support to guide your heirs toward better financial choices and outcomes.
Not every family should rush into intra-family loans. The best strategies depend on your financial situation, tax planning considerations, and family dynamics. But if you’re thinking about supporting your children while you’re still alive, it’s worth having a structured conversation about the best way to do it.
A financial advisor can help you evaluate:
Whether lending money aligns with your long-term financial security.
How to structure loans for maximum flexibility and tax efficiency.
What protections (like trusts or loan agreements) can help safeguard both parties.
If you’re considering helping your children now rather than waiting to pass down an inheritance later, we are always available to guide you through the options. Let’s make sure the next chapter of your family’s wealth story is built on a solid foundation