Family Loan Agreement

A family loan agreement documents a genuine loan between relatives by recording the funded principal, interest, repayment schedule, permitted use, default process, any collateral, and the treatment of later changes, forgiveness, incapacity, or death.

A useful document turns the parties' actual arrangement into measurable duties, approvals, timing, remedies, and a reliable execution record. Its terms should be reconciled to the transaction rather than copied from an unrelated form.

• A parent, grandparent, sibling, or other relative lends funds for education, housing, a vehicle, emergency expenses, or another stated personal purpose
• Relatives replace an undocumented cash advance with written terms before additional funds are disbursed, while separately accounting for any earlier transfer
• A family member lends money to a relative's business and the parties intend debt rather than an ownership or profit-sharing interest
• A family wealth or estate plan uses a repayable advance and needs the outstanding balance, payment history, and treatment at either party's death to be clear

The document name alone does not determine the right structure. Consider a different instrument or qualified legal review when any of these conditions applies:

• Do not label a transfer a loan when the lender does not genuinely expect repayment or intend to enforce the obligation; an outright gift, capital contribution, purchase of equity, or documented inheritance arrangement may require a different instrument and different tax treatment.
• Do not rely on a generic family form for a consumer-lending business, a dwelling-secured loan, a transaction with regulated collateral, or any arrangement subject to lender licensing, disclosure, ability-to-repay, usury, servicing, collection, foreclosure, securities, probate, or other jurisdiction-specific requirements.

Record exact facts before clauses are written. Names, authority, dates, amounts, defined terms, dependencies, and incorporated materials should be verifiable and consistent.

• Lender and borrower legal names, addresses, family relationship, legal capacity, tax and estate-planning contacts, business entity details if applicable, and each signer's authority
• Loan purpose, principal, funding date and method, prior advances, conditions to funding, borrower repayment source and ability, and records proving delivery and receipt of funds
• Demand or fixed-term structure, maturity, payment dates, amortization, interest rate, compounding convention, applicable federal rate analysis for the month of funding, late treatment, prepayment, and payment-application order
• Collateral description, ownership and existing liens, valuation, insurance, intended priority, required security instrument, filing, title, possession, control, mortgage, or recording steps, and release procedure
• Notices, cure periods, default and lawful remedies, modification or forbearance process, tax reporting, possible forgiveness, death or incapacity, successor and estate administration, assignment, and any intended relationship to inheritance equalization or business equity

These decisions shape the allocation of responsibility and should not be left for boilerplate to decide:

• Whether the parties actually intend a collectible loan with a reasonable repayment source, or instead intend a gift, future inheritance adjustment, business capital contribution, or equity investment
• Whether the obligation is payable on demand or over a fixed term, which AFR period and compounding convention are relevant when the loan is made, and how the stated rate, payment schedule, and federal and state tax treatment fit together
• Whether the loan is secured, which property supports it, what priority is acceptable, and which state-specific attachment, perfection, title, recording, insurance, release, and enforcement steps are required
• What happens after missed payments, hardship, forbearance, modification, refinancing, partial payment, or proposed forgiveness, and whether the lender will consistently document and administer those decisions
• Whether either party's death or incapacity accelerates, continues, assigns, offsets, or otherwise affects the debt, and how the agreement will be coordinated with valid wills, trusts, powers, estate administration, beneficiary treatment, and any intended equalization among family members

• Parties, family relationship, stated loan purpose, funded principal, evidence of disbursement, unconditional repayment obligation, and express distinction from a gift, inheritance distribution, and equity investment
• Interest rate and calculation, demand or term classification, installments, amortization, maturity, prepayment, payment method and application, receipts, ledger maintenance, and tax-information cooperation
• Representations, use restrictions if any, borrower reporting, covenants, notices, late payment, default, cure, acceleration, collection costs, forbearance, waiver, and remedies limited by applicable law
• Secured or unsecured status, collateral grant when used, lien priority, perfection and recording duties, preservation and insurance of collateral, permitted transfers, enforcement, and release after payoff
• Written amendments, renewals, payment holidays, partial or complete forgiveness, no implied waiver, assignment, death or incapacity, estate or trust succession, inheritance-offset instructions only through valid separate estate documents, governing law, severability, and execution

Every provision should use the same parties, dates, standards, defined terms, and document hierarchy. A clause that is reasonable by itself can still create a conflict when it is not reconciled with payment, default, termination, or another exhibit.

1. 01Describe the intended result and the relationship in plain language.
2. 02Confirm parties, authority, governing jurisdiction, dates, money, property, services, and approvals.
3. 03Resolve the key decisions and identify every schedule, exhibit, disclosure, consent, or filing.
4. 04Draft the provisions as one consistent system, then review the complete execution set before signature.

Family informality can undermine proof that an advance was a bona fide debt: a signed form alone may not overcome the absence of a real repayment expectation, payment history, collection intent, or consistent books and tax reporting. Interest-free or below-market terms, later forgiveness, repeated advances, and unrecorded payment changes can create imputed-interest, gift, income, bad-debt, estate, and accounting questions. State law may separately control capacity, usury, licensing, disclosures, servicing, collections, limitations periods, probate claims, and remedies. If personal property or real estate secures the debt, the agreement alone may not create or perfect the intended lien. Federal consumer-credit requirements such as Regulation Z depend on the parties, purpose, frequency, terms, and collateral and should be treated as conditional rather than assumed away merely because the lender is a relative.

The main agreement may establish the framework while schedules, exhibits, disclosures, consents, or operational records supply transaction-specific details.

• Promissory note, funding receipt or bank record, amortization schedule, payment ledger, annual balance confirmation, and the IRS revenue ruling supporting the selected applicable federal rate
• Borrower budget or repayment-source record and, for a business borrower, formation records, ownership schedule, approvals, financial information, and debt-versus-equity documentation
• Security agreement and collateral schedule, lien search, valuation and insurance evidence, financing statement, title notation, possession or control record, or jurisdiction-specific mortgage or deed of trust with filing or recording evidence
• Separate tax, gift, debt-forgiveness, estate, will, trust, beneficiary, probate, inheritance-equalization, and accounting records needed to implement consequences that the loan agreement alone cannot create

Each incorporated document should be identified precisely, use the same names and effective date, and follow a stated order of precedence if terms conflict.

Before funding, identify the governing jurisdiction and loan purpose, confirm the current AFR and tax treatment with qualified advisers, assess repayment realistically, sign the complete note and agreement, and complete every required collateral and consumer-credit step. Transfer funds through a traceable channel, maintain a principal-and-interest ledger, issue and retain any required tax records, follow the agreed payment and notice process, and document each amendment, forbearance, renewal, payoff, release, or forgiveness when it occurs. Coordinate the outstanding note with business books and valid estate documents so a death, incapacity, trust transfer, or intended inheritance adjustment is not left to implication. NOMOS provides general drafting information, not legal, tax, accounting, investment, lending, or estate-planning advice, and does not determine enforceability, tax characterization, regulatory coverage, lien priority, or inheritance rights.

• Confirm legal names, roles, capacity, addresses, and signing authority
• Reconcile dates, amounts, definitions, cross-references, schedules, and exhibits
• Confirm that duties, deadlines, approvals, acceptance standards, and payment triggers are measurable
• Check that default, termination, remedies, and surviving obligations work together
• Complete jurisdiction-specific forms, notices, witnesses, notarization, filings, or professional review when applicable
• Deliver and preserve the complete signed package with its incorporated documents

These sources provide federal, state-resource, regulatory, or institutional context. They do not replace checking the law and required forms applicable to the parties, transaction, and governing jurisdiction.

1. Source 1

   Topic no. 453, Bad debt deduction

   Internal Revenue Service. Official IRS guidance explaining that a deductible bad debt must be a valid debt and that, when money is advanced to a relative or friend, the parties must have intended a loan rather than a gift; it also identifies repayment expectation, collection efforts, and debt records as relevant evidence.

2. Source 2

   26 U.S.C. § 7872 — Treatment of loans with below-market interest rates

   Office of the Law Revision Counsel, U.S. House of Representatives. Current United States Code text governing specified below-market loans, including gift loans; deemed transfers and retransfers of forgone interest; demand- and term-loan definitions; applicable-federal-rate references; and statutory exceptions and limitations whose application depends on the loan's facts.

3. Source 3

   Applicable Federal Rates

   Internal Revenue Service. Official IRS index of monthly revenue rulings publishing short-, mid-, and long-term applicable federal rates and compounding variants used for federal tax purposes; the relevant ruling and rate must be selected for the transaction's month and terms rather than copied from a static form.

4. Source 4

   Instructions for Form 709 (2025)

   Internal Revenue Service. Official federal gift-tax instructions stating that gift tax can apply to debt forgiveness and to interest-free or below-market loans, and explaining the general treatment of direct and indirect transfers for less than full value.

5. Source 5

   Instructions for Form 706 (07/2026)

   Internal Revenue Service. Current official estate-tax instructions requiring mortgages and notes payable to a decedent to be identified on Schedule C when applicable, including face value, unpaid balance, maker, maturity, and interest information; the instructions also distinguish valid debts, liens, and notes payable by a decedent for Schedule K purposes.

6. Source 6

   Canceled Debt

   Internal Revenue Service. Federal tax information on canceled debt.

7. Source 7

   Uniform Commercial Code

   Uniform Law Commission. Model state-law framework for secured transactions under Article 9.

8. Source 8

   Regulation Z, 12 CFR § 1026.2 — Definitions and rules of construction

   Consumer Financial Protection Bureau. Current regulation and official interpretations defining consumer credit and creditor, including the regular-extension and transaction-count framework relevant to determining whether a family lender and a particular personal, family, household, or dwelling-secured transaction are subject to Regulation Z.