Make Sure to Lock In Low Rate Family Loans
The IRS just released the minimum interest rates for June 2016 and they continue to be at record lows. These tables represent the minimum interest rate that you need to charge on loans, etc. If you elect to not charge any interest, the tax laws require you to “impute” interest based upon these minimum rates.
For June, the required rates are as follows:
- Short-term (less than 3 years) – 0.64%
- Mid-term (more than 3 and less than 9 years) – 1.41%
- Long-term (more than 9 years) – 2.24%
Families should consider locking in these low rates by making inter-family loans. If the older generation is bumping up against the maximum life-time estate exclusion (almost $11 million for 2016 or about 1,000 acres of good farm land), it is important to keep their wealth at these levels and not increase it. By locking in long-term loans to the next generation (at 2.24%) to purchase additional ground or equipment or other investments, we can transfer the wealth created above the 2.24% to the next generation without incurring any gift tax.
However, this requires the investment by the next generation to grow at greater than 2.24%. As an example, if the investment can generate an 8.24% rate over a 10 year period on a million dollar investment, the family has effectively transferred over $600,000 (plus compounding) without gift or estate tax. If the older generation had made the investment, the heirs would likely owe about $250,000 of estate tax on the investment when they would inherit it.
Therefore, a good tool for farm families to transfer wealth at a low gift or estate tax cost is inter-family loans with locked in lower interest rates.
Paul Neiffer, CPA
CliftonLarsonAllen, LLP
Paul Neiffer is a certified public accountant and business advisor specializing in income taxation, accounting services, and succession planning for farmers and agribusiness processors. Paul is a principal with CliftonLarsonAllen in Walla Walla, Washington, as well as a regular speaker at national conferences and contributor at agweb.com. Raised on a farm in central Washington, he has been immersed in the ag industry his entire life, including the last 30 years professionally. Paul and his wife purchase an 180 acre ranch in 2016 and enjoy keeping it full of animals.
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