Avoiding Future Estate Disputes
Parents often help their adult children financially.
They may provide money for a down payment on a home, help start a business, pay off debts, or provide assistance during a difficult period.
Within a family, these arrangements can seem informal.
Everyone understands what was intended.
Or at least they think they do.
Years later, particularly after a parent has died, a simple transfer of money can become the source of a significant estate dispute.
Was the money a gift?
Or was it a loan that still needs to be repaid?
Why Does the Distinction Matter?
Suppose a parent gives an adult child $100,000 to help purchase a home.
If the money was an outright gift, the child generally does not have to repay it.
If it was a loan, however, the outstanding debt may be an asset of the parent's estate after death.
The executor may then have a responsibility to collect it.
That distinction can have a significant effect on both the child who received the money and the other beneficiaries of the estate.
If the arrangement was never properly documented, disagreement can follow.
Family Arrangements Are Often Informal
Parents and children do not always approach financial transactions the same way that unrelated parties would.
There may be no written loan agreement.
There may be no repayment schedule.
Interest may never be discussed.
Payments may be irregular or may never begin at all.
That informality may not cause any difficulty while the parent is alive.
After death, however, the executor and beneficiaries are left to determine what the parent actually intended.
Different family members may have very different recollections.
Put Important Arrangements in Writing
One of the simplest ways to reduce uncertainty is to document significant financial arrangements when they are made.
If the money is intended as a loan, the terms should be recorded.
That may include the amount advanced, whether interest is payable, when repayment is expected, and what should happen if the parent dies before the loan has been repaid.
If the money is intended as a gift, documenting that intention can also be helpful.
The larger the amount involved, the more important this becomes.
Consider the Will
A family loan should also be considered when preparing or updating a Will.
For example, what should happen if a child still owes money to a parent when the parent dies?
Should the executor collect the debt?
Should the debt be forgiven?
Should the amount instead be deducted from that child's share of the estate?
Different families may choose different solutions.
What matters is that the Will and the underlying financial arrangement work together.
Keep Records
Good record-keeping can also prevent problems.
Bank records, loan agreements, promissory notes, correspondence, and records of repayments may all help establish what happened.
Without documentation, an executor may be forced to reconstruct a financial arrangement that began many years earlier.
That can be difficult, expensive, and potentially divisive.
Talk About Significant Lifetime Gifts
The same principle applies to substantial gifts.
If one child receives significant financial assistance during a parent's lifetime, the parent should consider whether that gift is intended to affect the child's eventual inheritance.
Perhaps the parent wants all of the children to receive equal shares of the remaining estate regardless of previous gifts.
Perhaps the parent wants earlier assistance to be taken into account.
Either approach may form part of an estate plan.
The important thing is to make the intention clear.
Final Thoughts
Money transferred within families can easily become complicated after death.
What seemed obvious between a parent and child may not be obvious to an executor, a sibling, or a court many years later.
Clear documentation can help distinguish a gift from a loan and ensure that your estate plan reflects what you actually intended.
A conversation about a financial arrangement today may help prevent an estate dispute tomorrow.
If you have made significant loans or gifts to family members and would like to ensure that they are properly addressed in your estate plan, Tonelli Estate Law would be pleased to assist - BOOK A FREE CONSULT TODAY.
This article is for general informational purposes only and does not constitute legal advice.
