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Saturday, August 8, 2009

Do my kids have to repay my loans to them?

Plenty of parents have loaned money to their adult children, to help them buy homes, buy cars or for many other reasons. Usually a parent has loaned more to one child than the others because that child had a particular reason for needing help.

When the parent dies, what happens about the loans? Do the children have to pay them back or not?

The answer depends on the parent's Will. In the best case scenario, the parent has said something about the loans to give the executor direction as to what should be done. The parent can either say the loans are to be repaid, or say that they are to be forgiven. The executor will then know how to deal with it.

The parent does not usually mention a dollar amount in the Will, because he or she expects that the child will repay some or all of the loan during the parent's lifetime. In such case either the parent or the child will have to keep receipts or records of some kind to document any amounts that were repaid.

What happens most of the time, unfortunately, is that the parent doesn't say anything about the loans in the Will. If that is the case, the executor has to fall back on the law to know what to do. The executor's job includes gathering in any money that is owed to the deceased parent, and that includes loans to adult children. This is an area that causes one heck of a lot of trouble when a parent dies, because the adult child who has had a loan might say that he and the parent had an understanding that the loan should not be repaid. In other words, it wasn't a loan, it was a gift and the parent at no time intended it to interfere with any inheritance. Without the parent's written instructions to back that up, the executor is going to have to collect the debt. The executor isn't legally in a position to say "oh just forget about it."

In practice, what happens is that if the adult child is going to inherit anything from the parent's estate, he or she doesn't actually repay the money to the estate. Instead, the amount that he or she owes is subtracted from the inheritance (called a set-off).

Whenever I talk to people to plan their Wills, I always ask whether they have loaned any money to their adult children, and ask them what they want done about it. Many parents are committed to the idea that all children are to be treated equally and therefore any loans must be set off. Other parents believe that they gave help that was really needed and that it would punish the child to have to repay the money. Everyone has his or her own view on this.

If you have adult children to whom you've made loans, make sure this is addressed in your Will. If you are one of those adult children who has had a loan from parents, perhaps you should suggest to your parents that they mention in the Will what is to happen about the loan after the parent has passed away.

1 comment:

  1. My mother passed away, when she was alive I loaned her and my step father 10,000. to purchase a car. The car is in my mother's name, step father has no license. My mother and step father also rented my second home. My step father just moved out of my home, he purchased a home of his own at the end of October. This past Monday, my contractor, repairing the home that is now vacate, contacted me and informed me that the vehicle was removed from the property. Do I take my step father to smalls claims court for the 10,000 owing. I do have proof of the money loaned to them.
    How would I get the car back if he refuses to pay the money.

    ReplyDelete

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