“Soft” Loans for Children as an Estate Planning Tool
December 22, 2017 - 0
Parents quite often make loans to their adult children to help them purchase a car, a home, or for other reasons. A
loan is different from a gift. The parent can charge interest so that the loan will earn some investment income. The
loan can be set up for blended payments of principal and interest or to pay interest only. There is no requirement for
the parent to charge interest.
For a long term loan used to purchase a house, for example, it is quite possible that the loan will not be repaid during
the parent’s lifetime. The parent could provide in her or his will that any remaining balance of the loan will be forgiven
or instead become part of the child’s inheritance. Such an arrangement does not cause any adverse tax consequences
because the “debt forgiveness” rules in the Income Tax Act do not apply to the settlement of loans by inheritance or
bequest.
Giving your child this type of “soft” loan is similar to giving them a part of their inheritance early, during your lifetime.
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