Tag Archives: Estate

Summertime is the Time to Make Intra-Family Loans

Interest rates have hit a low point this summer.  Low interest rates set each month by the IRS (the applicable federal rate (AFR) and the 7520 rate) make some estate tax planning strategies particularly effective.  For this reason, it may be a good time to take a break from the heat and sun this August to do some estate tax planning.  It will save your family some money, and perhaps pay for next year’s summer vacation. 

One estate tax planning strategy that is very effective when interest rates are low are intra-family loans.  Intra-family loans are loans to family members.  They can be made outright to a family member or to a trust for his or her benefit.  Often parents or grandparents wish to loan money to children or grandchildren to buy a new home, renovate an existing home, or make a business investment.    The loans can be forgiven over time to take advantage of the lender’s gift tax annual exclusion and to maximize wealth transfer planning. 

The IRS requires that the lender charge interest on an intra-family loan at the applicable federal rate (AFR).  This rate is set each month by the IRS, and has been trending downward since early 2019.  The August 2019 AFR for a mid-term loan (with up to a 9 year term) is very low – 1.85%.  In fact, quite surprisingly, the mid-term AFR (1.85%) is lower than the short-term AFR (1.89%) which means the loan can be for a longer term with a lower rate. 

A low interest rate makes intra-family loans an appealing estate tax planning strategy.  If you are considering a loan to your children or grandchildren, this may be a good time to make one.  In addition, if you have an existing outstanding loan, this may be a good time to refinance it. But be careful, and get good advice.  The loan must be documented by a Promissory Note and the lender must charge interest at the AFR.  Otherwise the IRS may view it as a taxable gift. 

The Estate Planning Prize Buried in your Breakfast Cereal

The story of the Kellogg brothers – inventors of Kellogg’s Corn Flakes – offers a surprisingly interesting lesson about Estate and Charitable Planning.  Their story is told by historian Howard Markel in “The Kelloggs: The Battling Brothers of Battle Creek”. 

“The Kelloggs” is about food history, business, and family dynamics, but also about the brother’s estate plans and charitable foundations.

John Harvey Kellogg was a medical doctor who founded the Battle Creek Sanitarium in 1886.  The Sanitarium (or “San” for short), located in Battle Creek, Michigan, was a health and wellness resort spa at which John Harvey treated patients and preached his views on health and wellness.  He believed that a healthy breakfast was essential to good health and required his patients to eat his own Toasted Corn Flakes while at the San.  John Harvey was a physician, author, and preacher who became the father of the modern wellness movement. 

The younger Will Keith (W.K.) Kellogg started his career as John Harvey’s business manager but later used his business acumen to commercialize and distribute Toasted Corn Flakes across the country.  He founded the Battle Creek Toasted Corn Flake Company, later the Kellogg Company.  He was a successful businessman who revolutionized American food production and the way we eat.

The brothers spent most of their lives at odds with one another – personally and in business.  They spent years litigating who owned the rights to their Toasted Corn Flakes.  (W.K. won, for the most part.)  As a result, both men died unhappy, but wealthy (W.K. considerably more so) and left the bulk of their estates to charities.  Their charitable goals and success at achieving those goals were very different.

Upon his death in 1943, John Harvey left his entire estate to his foundation, the Race Betterment Foundation, which was devoted to promoting eugenics, the science of improving the population’s genetics.  Within twenty years of John Harvey’s death his Foundation’s endowment was depleted because of its controversial and questionable charitable goals as well as trustee misuse.

W.K. had far greater charitable success.  In 1931, he founded the W.K. Kellogg Foundation, a charitable foundation devoted to promoting the welfare, health and education of children.  He was motivated largely by personal tragedy.  His young grandson had fallen out of a window as a toddler, suffered a severe head injury, and required lifelong care.

In 1934, W.K. endowed the Foundation with more than $66 million in Kellogg company stock and other assets.  He left the bulk of his remaining estate to the Foundation at his death in 1951.   The W.K. Kellogg Foundation still exists today with an endowment of over $9.5 billion, one of the largest charitable foundations in existence.  It continues its mission to help vulnerable children, and its headquarters remain in Battle Creek. 

To learn more about how to achieve your charitable goals in your estate plan, consult with a good estate planning attorney.