Loan forgiveness has become a hot topic the past couple of years, and you have kept that in mind as you prepare your estate plan. Some of your children have led financially responsible lives, while others needed a little more guidance.
And that guidance included a great amount of money from you. You provided loans that helped pay for college, start a business, pay off credit card bills as well as car repairs. Maybe one of the best things you can do is to forgive those loans and not strap heirs with additional debt that you know they likely can never repay.
Declare and explain your plans
If you choose to forgive certain loans made to heirs, please consider taking the following steps:
- Discuss your intentions with them: Let them know certain details about your estate plan and that you plan to forgive loans that you made to specific family members. Carefully explain your decisions and why you chose this route. This initially may be a surprise to them, but they may gain some peace of mind knowing your intentions.
- Have the plan in writing: This decision is a part of the estate planning record, and you want it firmly understood with a document in place. A document reinforces what you already should have told them. Without written directions, you may unintentionally create animosity and dissent among your heirs.
- Research any possible tax concerns: By forgiving an intrafamily loan, your estate or your child who borrowed the money could face tax issues. However, in most cases, a forgiven loan is a gift. Typically, in this scenario, there are no tax issues.
A delicate but firm approach is needed in explaining your decision to your heirs. If you have always been upfront with them, continue to do so.
Do not overlook that forgiving loans is an option to pursue in estate planning. Make sure to let your heirs know about your plans but prepare for potential disputes. Tactful reasoning can go a long way.