Have you ever given or lent your children a substantial amount of money? Maybe you wanted to help your kids make large enough down payments on their houses so they would qualify for lower interest rates. Maybe you helped pay for a car when they started careers. Maybe you paid for a wedding. Or two. Parents often help their grown children financially but for estate planning purposes they should document the financial help they give.

When a parent lends money to a child, unless the loan has been forgiven the parent’s estate will still be owed any outstanding balance upon that parent’s death and the balance will be counted as an asset. During trust and estate administration, the balance may be deducted from a legatee’s or a beneficiary’s share. If the balance exceeds the legatee’s or beneficiary’s share, however, the difference will still be owed.

Forgiving a loan. It is quite common for parents to forgive a loan made to a child but Schmidt & Lerner would like to highlight three important things to remember. First, a loan can be forgiven in an estate plan but the loan forgiveness should be made explicit. Be specific. For every loan made, state the parties, the date, the amount lent, any other important terms of the loan, and that the outstanding balance on that loan is expressly forgiven. It may be sufficient to offer a blanket statement forgiving “any and every loan” (or words to that effect) but we believe it is preferable to err on the side of specificity. Better still, we encourage parents who transfer money to their children to do so formally, in writing, outside their estate plan. Make it clear whether a transfer is a loan or a gift and address loan forgiveness in that writing.

Second, be careful of sweetheart loans. A parent may lend money to a child with little or no security or at a lower interest rate than the child would qualify for on his or her own. That same parent should not be surprised, however, when such a loan must legally be treated as a gift. Whether you want to make a loan or a gift, it might help to ask an attorney to review the specifics and offer advice.

Finally, when a parent forgives a loan, the amount forgiven becomes a gift. We will undoubtedly address this more extensively at a later date but gifts can be taxable so the giving parent or the estate/trust administrator should keep careful records.

Whether a parent’s generosity is a loan or a gift is not always clear to others. Document all financial transactions that could be considered one or the other. Also, be sure your estate plan is updated to let the executor or trustee know how each loan or gift affects distributions.