I'd like to loan my son and daughter-in-law money to pay off credit card and student loan debt. Total is 40k. I want to avoid tax problems and they would be responsible to repay or repay upon their inheritance (last resort). They own a home and have equity available if needed. Any ideas?

  • So then is your goal to loan her money interest-free and tax-free, but you want a legally-binding secured loan (use the home/equity as collateral in case of non-repayment)? Is all that correct?
    – Nosrac
    Jan 28, 2017 at 17:03
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  • Daniel - The goal is to make the loan in a way that it is tax-free to them (no gift tax) and legally-binding is a minor issue. I had seen some advice that suggested a home equity type loan would be a good idea. I would rather it be interest free but if I had to chart the AFR I would.
    – Pete K.
    Jan 28, 2017 at 18:31
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    Gift tax is assessed on the donor, not the recipient. Jan 28, 2017 at 21:06
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    There is a minimum rate that you must charge. It's tiny, but you have to charge it. Consult a tax lawyer.
    – acpilot
    Jan 29, 2017 at 1:03

2 Answers 2


As Stan's answer recommends, don't give them the money; make the checks payable to the credit-card company or the bank that issued the student loan so that those debts get repaid for sure, or else you run the risk of that money also going the way of all flesh and the debt remaining untouched. Next, file a gift tax return (Form 709, which is not filed along with Form 1040; all 709s go to one IRS office as described in the instructions), saying that you gave your son and daughter-in-law gifts of $20K each (say) and that you want to have $12K (excess of each gift over and above the annual exclusion of $14K per recipient) count against your combined lifetime estate tax and gift tax exclusion (which is currently over $5M). So, no gift tax needs to be paid. (As JoeTaxpayer's comment points out, if you are married and your spouse is willing to join in this, then as much as $56K can be given without anyone having to file Form 709). Then, change your will to reduce your son's and daughter-in-law's inheritance by $40K. If and when they return the money (as a gift to you), change your will back by removing the reduction. If the repayment is is a lump sum, the gift tax return stratagem can be used by your son and daughter-in-law while if they pay back over two years, no gift tax return need be filed.

So., that's it. No interest to be paid by anybody, no gift taxes to be paid by anybody, no income to be reported on any tax return, etc.

This will work unless you have serious concerns about reducing your combined lifetime estate tax and gift tax exclusion by $12K, and if you do, you can afford to hire plenty of lawyers to advise you on better strategies.

  • +1 - If OP's concern was taxes, not getting the money back, this answer is perfect. It avoids ongoing tracking and interest payment concerns. The only thing I could add. If OP has a spouse, there is $14K x 4 = $56K total that can be gifted each year with no paperwork. Jan 29, 2017 at 17:13
  • @JoeTaxpayer Thanks. I have incorporated the spouse making gifts idea into my answer. Jan 29, 2017 at 20:05

The bottom line is that this just does not work, and as such you should not do it.

Here is a question that you really need to think about: How will you handle non-payments? How will you handle it when they talk about purchases they made or vacations they went on when they have been short for the last three months? Yes, it will happen.

The majority of people who engage in debt consolidation, which you are proposing, end up with the consolidated debt and more consumer debt. One cannot borrow themselves out of debt.

Carrying credit card debt is a sign of poor money management and improper spending behavior. That behavior will not change if you "bail them out" with the consolidation. They need to find a way to work their way out of this situation by budgeting, living a more austere lifestyle, and earning more.

Encouraging them to do so will serve them far better then your generous attempts to reduce the pain of their own making.

In the end it is always a parent's desire to help their children. If you can afford to give, then it is well within your right to do so. It is also within your right to qualify that giving with behavioral conditions. However, if you cannot afford to give, it is best not to loan.

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