Dear Rick

My sister and her husband have been in severe financial distress as result of COVID-19. I want to give my sister some money; however, my wife is opposed to it; she believes that we should loan her the money, not give it to her.

In order to promote harmony at home, I have decided to loan my sister the money as opposed to giving it to her. I have a few questions about that. The first is, if down the road I forgive the debt to my sister, is there any tax consequences to me or to my sister?

My wife also wants to know what happens if my sister and her husband declare bankruptcy; do we lose the money? You should know that we are planning to loan my sister and her husband $50,000, and my wife insists that everything must be put into writing.

Thank you, Bret

Dear Bret

First, I agree with your wife that whenever you loan money to family and friends, it’s important that the agreement be put in writing. You do not want any misunderstandings, which can cause family disputes.

With regards to if you and your wife decide to forgive a portion or the entire loan, there are tax consequences. If you forgive the debt, in effect you are making a gift to your sister and her husband. As a result, there are gift tax consequences.

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