Loan forgiveness: an estate planning option that benefits heirs

The lengthy discussion on loan forgiveness for college graduates and students reached a crescendo with President’s Biden’s recent decision allowing millions to forego repaying certain amounts to the government.

In estate planning circles, such news may make some testators—the people who create a will—ponder whether to consider loan forgiveness when assembling a will. Why? Well, many of these people have provided significant loans to adult children for things ranging from mortgage down payments, seed money for a start-up business, health care costs, car repairs and even college tuition.

Have the plan in writing

Forgiving intrafamily loans has certain consequences. Some of those consequences will benefit heirs who borrowed thousands of dollars. Other heirs who did not borrow money and have displayed strong financial knowledge throughout adulthood may feel left out, though.

Here are three important steps to take when considering this option:

  • Discuss your intentions with your family and heirs: Talk to your heirs about your estate plan and explain your decision as to why you are forgiving these loans. Doing so likely will prevent any surprises for your heirs.
  • Ensure that you have the loan forgiveness plan in writing: Although your word is good, communicating such wishes verbally does not cut it on the legal landscape. You must have your intentions clearly made for the estate planning record. Doing so may prevent disputes among heirs.
  • Know that tax consequences may exist: Both you and your child who borrowed money potentially face such a scenario. Typically, though, tax issues will not surface. And once you forgive a loan, it is deemed as a gift.

It takes a generous, benevolent and wise person to choose loan forgiveness for family members. In doing so, you and certain family members may gain a great amount of peace of mind.

Prepare and communicate

Many details require careful consideration in estate planning. Forgiving loans to family members is just one of them. You want to remain comfortable with such a decision, so make sure to prepare and talk with your heirs in an effort to avoid any potential relationship pitfalls.

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