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Thursday, March 25, 2010

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.

17 comments:

  1. If i die before my parents,does everything they will to me go to my children.

    ReplyDelete
  2. Hi there,
    To know the answer to this, you would have to read the Will itself. Your parents can choose in their Will whether they want your share to go to your children or to someone else, should you predecease them. By far the most common scanario in Wills is for the share of a deceased child (e.g. you) to be passed down to the children of the deceased child, but it is not required by law. The next most common scenario would be for your brothers and sisters to divvy up your share should you pass away before your parents.
    Because you mentioned a Will, I'm assuming that you know for sure that there is one. This makes a difference too, because if there is no Will, the estate will be distributed according to the intestacy laws of wherever you live. In most places, the share of a deceased child is passed down to the children.
    I blogged about this recently. Read the post here:
    http://estatelawcanada.blogspot.com/2010/07/does-intestacy-work-differently-in.html

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  3. My mother has a will that provides that, upon her death, the inheritance is split 50-50 between my brother and me. That is how the rules have been understood for a long time. Recently, my brother and I were having a discussion and he subtly suggested that some of the inheritance should go to his children and his grandchildren (my mom's grandchildren and great grandchildren). I don't have a problem with that except it should be funded by reducing my brother's inheritance. What is your experience with the common practices in the treatment of grandchildren/great grandchildren?

    Also, I am not sure that I agree with the position that a sibling's children should inherit the deceased sibling's share of a parent's inheritance. I believe 100% of the inheritance should be shared between the surviving children (not grandchildren). Parental inheritance should be reserved for the children and share in precise equality. If I want y children to have a share of my parent's wealth, I will give it to them (when and under the conditions that are of my choosing). My children will have THEIR turn to inherit MY wealth (from THEIR parents) when I die.

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    Replies
    1. So if you die before your parents, they get nothing.

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    2. That's the problem that parents don't take into account.

      Delete
  4. You and your brother certainly represent differing points of view on this. I would say that your approach is the more common, based on the families I've met over the years. At the end of the day, your Mom is the one who has to decide who she wants to give her estate to, regardless of what her kids think.

    I wonder whether your brother has a reason for wanting the money to go straight to his children. It can't be for tax reasons, as the inheritance isn't taxable. But there could be other things he doesn't want to divulge, such as problems with creditors.

    If your Mom gives the estate to you two kids, then you are of course free to do as you wish with it. If your brother wants to share with his kids, he can do that. If you don't want to, you don't have to.

    Lynne

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  5. Upon my mother's death. One of our siblings who is not the executor has demanded that who ever owes mother money must be paid to the estate. Some of the siblings have stated that mother did provide them with a loan and they will repay. But one other sibling stated that mother did indeed give them a gift for a home and repayment was not required. There is a will but only the 2 loans to the siblings are required to repay to the estate not the money of gift to the other sibling. Nothing was documentumated for the gift but there is some cheques where mother hand printed the sibling first name on the reciept. All the other siblings do not have an issue with the money given as a gift with the exception of one sibling. What is legal here and can the sibling who was given the gift be made to repay eventhough that was not the intent by mother.

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  6. Two sons are in line to inherit $30,000 each from their dad. One son receives a $15,000 loan and that this amount would be deducted from his $30,000. But in the following years the father spends all of his money. Can the other son go after the first son for half of the $15000 loan?

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  7. My parents loaned money to a grandchild and upon their death wish to forgive the unpaid portion. They want to sign a letter to that affect and keep with their papers and one for him to have. Grandchildren are not beneficiaries of their will. This loan was done without anything in writing. Is the granchild legally covered if a letter is done?

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    Replies
    1. I would think that would be satisfactory for estate distribution purposes. It's the executor who has to determine whether there is a debt to be collected from the grandchild, and a letter directly on point like that should surely answer the question.

      Lynne

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  8. My wife of 26 year passed away in october 2015 she did of not a will.Her former husband passed away in 2014 he had put in his will that if he passed my wife was suppossed to get Around $4500 dollars.However the papers what my wife
    was to sign came a month before she passed.She never saw the papers herself.
    My step daughter got the papers in january 2016 i had to fill in the questions and send them up to the insurance company from her father.Than afterwards the insurance company told her
    that i should have not to fill in the papers because she was told if my wife
    passed away than the money was to be divide under the 5 children and not given
    to me.My stepdaughter told me that her brothers will give there part to me but i think they wil not so i have written that off. Have you seen cases like that before
    I paid for the whole funeral myself from her mother.

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  9. Can the executor of estate legally use emails from my deceased mothers email accounts to go after money she lent to her kids over the past 5 years? The emails do prove laons were given and promised to be repaid. Is is legal for executor to do this?

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    Replies
    1. I don't know in which way the executor is "using" those accounts. I'm assuming you are talking simply about reading them to find out about what is going on.

      I don't see anything wrong with that. An executor is entitled to step into the shoes of the deceased and to see all paperwork, records, etc that relate to the financial affairs of the estate. There is no reason why emails would be excluded.

      I've never researched this particular question so I can't quote a case to you, but this seems logical to me.

      Lynne

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  10. I am an executor for my mother's estate. Her assets are fairly straightforward with only bank accounts, TFSA's, and GIC's. Her will is also quite simple with one share for each grandchild and the balance split equally among siblings. The challenge when she passes away is that one sibling owes more money than she would be entitled to in the estate. It is doubtful whether the any of it could be collected. (my mother is not having any success with this while alive so it won't get easier once she passes away) The will makes no reference to the loan. I was able to have my mother meet with the lawyer a couple of years ago and sign a codicil indicating the amount owing at that time, and that any amount owing upon death (legally owed or not) would be deducted from any inheritance. The loans have mostly been informal with only a portion identified with a promissory note. Requests to my sibling to confirm the amount owed have been ignored but I have sent regular statements quarterly as ongoing loans with some repayments have been made. Yes, it's a mess. My question is related to the amount owing above the inheritance share. If it is not collectable, am I allowed to write it off or what extent am I required to go to in terms of trying to collect it?

    ReplyDelete
    Replies
    1. The test for any executor trying to collect on any debt to the estate is whether it is going to cost more to collect the debt than the debt itself. We know your sibling isn't going to cooperate so that means you'll have to sue him or her. Then you'll have to collect, assuming there is anything to collect. There are a lot of costs involved in the process.

      You are allowed to write it off if there is simply no sense losing estate money chasing a debt that is essentially non-collectible.

      I don't know for sure that this one IS noncollectable - that's for you to figure out - but if you go that route, think about sharing that decision with the other beneficiaries to explain why you didn't collect it. You don't want them to think you just ignored it.

      Lynne

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    2. Thanks. While that amount that we might not be able to collect is will be significant, when spread out over the remaining beneficiaries it is not worth further damage to family relationships to go the route of suing. Other family members will be involved in the final decision. Ability to repay, and willingness to repay are not the same. Just wasn't sure what was required in terms of trying to collect before it didn't make sense anymore. Thanks for your insights.

      Delete
  11. Hi Cat,
    I'm not convinced either. This is just asking for trouble. Even if your brother were not unstable and volatile, he is human and it's really tempting to resist paying back a large sum of money.

    Anything that is going to have any legal effect at all has to come from your Mom. Perhaps she feels that going through the lawyer just for this is unnecessary or just thinks it makes it seem like a bigger deal than she thinks it is. Would she be willing to make a handwritten codicil to her will that simply addresses her wishes in this regard? As long as she is careful not to call it a will or do anything else to accidentally revoke her current will, a handwritten note would not need a lawyer or witnesses.

    Lynne

    ReplyDelete

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