If my parents lend me money, do I have to repay it after they die?

Plenty of parents help out their children by lending money. Often it is for the down payment on a home, renovations or other major purchases. The amounts can be quite large. Sometimes the arrangement is formalized in a document, but most of the time it is not written down.

When the parent who has made a loan passes away, there is a question about whether or not the parent intended for the loan to be repaid. Often the child understands (or hopes, perhaps) that the money was a gift and the parent intended to forgive the loan all along.

But what happens if the parent makes a Will in which he or states that all of the children are to inherit equal shares? Does this mean that one child has received more than his or her share? And what if the parent died without making a Will at all? How should the loan be dealt with?

Let's look first at what happens if there is a Will. A parent can state in the Will whether or not he or she wants the loan to be forgiven. If the parent says in the Will that the children are to get equal shares of the estate but loans are to be forgiven, then the equal shares are calculated as if that loan had never been made.

If the parent says in the Will that the loan is not to be forgiven, then the child who received the money will receive less from the estate. It is rare that it actually involves the child repaying the loan. Unless the loan was larger than the share the child will inherit under the estate, it's simply a matter of subtracting the loan amount from the share. For example, if Sam was supposed to inherit $50,000 but had received a loan of $10,000 from his mother, and the mother's Will said the loan is not to be forgiven, then Sam will inherit only $40,000. This process is called set-off.

If a parent leaves a Will but doesn't say anything about loans to children, the executor must follow the general duty of collecting all debts owed to the deceased and his or her estate. This includes loans to children, so the child would have to repay it (or there would be set-off). This can be a real mess at times, for a couple of reasons. One is that if there is no documentation, the executor will have to prove the allegation that there was in fact money changing hands. This causes delays and usually friction between people as well. Another is determining the amount first loaned, and any amount repaid. The executor can't always count on co-operation from the child, for obvious reasons.

Now let's look at what happens if there is no Will and the parent has made a loan to a child. The Intestate Succession Act specifically states that in this case, any money given to a child is deemed by law to be a loan and not a gift. This would mean repayment or set-off. The same problems exist for establishing the amounts.

If you are a parent who has made a loan to one or more of your children, check your Will to see whether you've addressed the issue of repayment of loans. If not, do your children and your executor a big favour and deal with it so that nobody has to guess or litigate to figure out what you intended.