A family member may need more than the $14,000 annual gift tax exemption allowed and a loan can sometimes be the answer.
The annual gift tax exemption of $14,000 ($28,000 for a couple) is sometimes sufficient in terms of gifting money, but a specific reason for the gift could push that number higher. A loan can sometimes be the answer.
A good example may be a family member finishes school and they want to start a business. You may want to give $14,000 to help them get started but that amount could be below the amount required and an intra-family loan could be the answer as Forbes points out in "Tax-Free Transfer: Intra-Family Loans Are A Steal Now." That option could be a particularly good option right now as the IRS mandated rates on these loans are currently very low.
Of course, you cannot just give a child money and call it a loan to get around the gift tax. Intra-family loans need to be written down. The child, or other recipient, will have to make payments as dictated in the loan agreement. You will have to report interest payments as income on your income tax returns.
The requirements for an intra-family loan are very strict and an estate planning attorney could possibly suggest ways that the loans can be used in combination with trusts for extra benefit.
Reference: Forbes (Dec. 9, 2015) "Tax-Free Transfer: Intra-Family Loans Are A Steal Now"