You’ve always had a generous soul, and that’s often led to an open wallet. However, you’ve never lent anybody more than you could afford to lose.
Some of those loans, however, have been hefty. Maybe you lent a brother money to fund his business goals or helped your daughter with a down payment on her home. Maybe you made loans to friends for various reasons.
Now that you’re getting older, you have started to consider what will happen to those debts if they’re still unpaid at the time you die.
You may have the option to forgive the debts
Forgiving the debts you’re still owed by those you love could be a last generous act – and you may be able to accomplish it in your will. However, the issue needs to be handled carefully. Some of the things that have to be considered are:
- You generally cannot forgive debts through your estate if you are insolvent when you die. In situations like that, your creditors may have the right to call in their loans so that they can get paid.
- You cannot deprive your spouse of their rightful share of your estate. If the loan forgiveness would diminish what they are due from a spouse’s elective or statutory share, the loan would still have to be repaid.
- You need to decide how the loan forgiveness will affect the rest of your estate distribution. It might be unfair, for example, to leave each of your three adult children $100,000 apiece and forgive the $100,000 debt of one at the same time (essentially doubling their inheritance at the expense of the other two).
There are no right or wrong answers to this question. It’s wise to consider your entire financial picture as you develop your estate plan. Experienced legal guidance can help.