How Do I Forgive a Child's Debt?

When a grown child needs financial help, often parents step in to provide the needed assistance. This assistance may be a loan or a gift, depending on the circumstances. You may simply give the child the needed money. But repaying a loan can give your child a sense of accomplishment, so you may choose to lend the money. Forgiving a child's debt is a way to further help your child get a solid financial start.

Instructions

1

Weigh carefully the pros and cons of forgiving the debt before you decide. Though most parents have a deep desire to help their children, forgiving a debt may be unwise in some circumstances. If your child incurred the debt because of irresponsible behavior, forgiving the debt will only reinforce this behavior. Forcing a child to experience the negative repercussions of debt may help him to avoid similar situations. Conversely, if your child incurred the debt because of illness or education, forgiving the debt can be a way to ease his financial burden.

2

Ensure you can handle the financial repercussions of forgiving the debt. If you used retirement savings to help your child, assess whether forgiving the debt would affect your plans for retirement.

3

Discuss your plans for forgiving the debt with your child after you decide to proceed. Explain your reasons and your desire to help her financially. Use the term "gift" in describing the debt forgiveness. According to IRS Publication 4681, canceling a debt and characterizing that action as a gift prevents it from triggering any tax liability for your child.