Forgiving a loan made to a family member

January 20, 2021 10:12 AM

I made a substantial loan to a family member several years ago. Both of us are US-ian. Though we have a signed loan agreement etc., we didn’t go through a conventional lender or anything else - I just sent her the money. I plan to forgive the debt. Is there any annual limitation on the amount that I can forgive per year, or may I simply send her an message notifying her I’ve forgiven the debt in total? (She knows I now plan to forgive the debt, there is no family drama - this question is just about the legal elements)
posted by anonymous to Work & Money (8 answers total)

Forgiveness of the debt is a gift. If the amount is above the annual limit for gifting, you will need to file a form with the IRS to account for it in your lifetime limit, but it won't come with any tax liability for either party unless you have already given away enough money that you'd certainly already be aware of the requirements.

The precise information/dollar figures is available on the IRS website.
posted by wierdo at 10:18 AM on January 20, 2021 [4 favorites]

From your perspective, you can just not collect the debt and if it's within the annual gift exclusion ($15,000 this year, I believe), it's done. If it's above $15,000, it will count towards your $11 million-ish lifetime gift exclusion, unless you split it over multiple years. Your lifetime gift exclusion comes into play if and when you leave an estate subject to the estate tax, if that's a thing you're worried about, and if it is, you should be asking your attorney about this for goodness' sake.

From your relative's perspective, it might be nice to have something in writing in case you change your mind later.
posted by skewed at 10:33 AM on January 20, 2021 [3 favorites]

An attorney (US) pointed out to me that outstanding debts to family members can be used to demonstrate financial hardship to a court or means-based social program, so perhaps you'd want to check with your family member on whether this is relevant before forgiving the loan.

(Evidently this is constantly used by wealthy people for all sorts of tax-avoidance and legal shenanigans, so don't feel any moral apprehension about using it yourself as long as you comply with the law.)
posted by Sockpuppet Liberation Front at 10:53 AM on January 20, 2021 [14 favorites]

The IRS expects taxpayers to report forgiven loans and pay taxes on that money. There are exceptions though and a gift is one of them, according to publication 4681:

"Gifts, Bequests, Devises, and Inheritances
In most cases, you don't have income from canceled debt if the debt is canceled as a gift, bequest, devise, or inheritance."

I would include language in your note that this is a gift and, as described above, report it as a gift with the IRS if it meets the dollar threshold.
posted by soelo at 11:58 AM on January 20, 2021 [2 favorites]

Note that until the loan is forgiven, there is a minimum implied interest rate according to the IRS. If you aren't collecting that, then that is another gift. (I think) Here is a little background on that.

Depending on the size of the loan, you can also go back and call the whole thing as a gift. If it is less than the annual gift level, you're done. If it is more, you file something a paper with the IRS that you have to hold on to the for the rest of your life and it counts against your total gift/estate tax exclusion ($11 million dollars, although likely to change before you die). Note that the annual gift tax limit of $15,000 is per person. If you are married, you and your spouse can each give the same person $15k and if the person is married and you are married, the four of you can transfer $60,000 from your family to theirs and still be within the annual gift amount.
posted by metahawk at 4:33 PM on January 20, 2021

Have the recipient consult at least an accountant in their jurisdiction as to whether this is advantageous to them and how best to go about it. Depending on what the accountant says, a lawyer may be in order.
posted by lookoutbelow at 5:18 PM on January 20, 2021

This is so dependent on the jurisdiction that you shouldn’t listen to answers on here. Knowing people who regularly transfer large amounts of money between family, you’ll be fine unless the amount is in the seven figures.
posted by geoff. at 7:54 PM on January 20, 2021

Not a lawyer. I would want something in writing so that the debt is legally cancelled and not an issue in either estate after death.
posted by TrishaU at 9:50 AM on January 21, 2021