It’s common for people to accept loans from family members or friends. This can be to help pay for mortgage deposits, home repairs, to cover business investments or help pay for large purchases, to name a few.
As the loans are handled ‘informally’, they tend to lack any clarity of what will happen if the lender passes away. This, we know from experience, can lead to problems.
Our Wills, Trusts & Probate department often receive enquiries regarding repayment of ‘informal loans’ between family and friends, and what happens after the lender passes away.
The common questions are:
Do debts have to be repaid to the lender if they pass away?
If money is borrowed from a family and they pass away, do I have to pay this back?
The short answer is that most debts need to be repaid if the lender passes away unless they state in their Will that it is a gift.
When does a loan turn into a gift?
Sometimes a loan will be converted into a gift.
If a loan was provided by a relative or a friend, they might state in their Will that the debt doesn’t have to be repaid to their estate after they pass away.
However, if the loan is not addressed in the Will then it must be repaid along with any interest that has accrued.
Often, with informal loans, there is little or no paperwork to prove the terms of a loan. This can be very problematic for the person who has borrowed the loan and for the executor of the deceased’s estate.
We know from experience that informal loans between family and friends can be very problematic when it comes to dealing with the lenders estate after death. However, there are measures that can be taken to prevent problems with managing the estate. These measures are also sensible decisions to make from a legal standpoint.
What measures can I take to informal loans more secure?
The simplest measure you can take is to create a written agreement between both the lender and the borrower. The agreement should confirm the terms of the loan. The executor of the estate will then find it easier to enforce repayment if they need to.
It’s also sensible to have a written agreement so that both parties are clear about the terms and conditions of the loan to avoid any confusion or disputes.
Review and Update Your Will
As a rule, you should always review and update your Will regularly when changes in your personal circumstances occur. However, you can also make updates to your Will to reflect any instructions for your executor after you have passed away.
Updates can include documenting an informal loan and the repayment agreement. This makes it easier for their executors to decide how to deal with debts they are covered in their Will.
Alternatively, you can also make specific arrangements in your Will, such as stating that the person who has received a loan will have this amount deducted from any inheritance they are entitled to.
However, unless the Will makes it clear that the beneficiary can keep the loan money in lieu of their share or the executors agree to that arrangement, the loan must be repaid. The borrower then receives their share of the estate in the normal way.
Also, it’s important to remember that owning a Will, or reviewing one, is not only for people over a certain age. Death can happen at any age, at any time. Don’t put off making or updating a Will because you think that you don’t need to due to your age.
See more on this in our ‘Why you should have a Will when you’re young’ article.
We deal with many clients where money has been loaned to family or friends which has left their Wills and estates in a terrible mess after they pass away. And we are experts in Wills, probate and estate planning.
Written by Stephanie Chung, Wills, Trusts & Probate specialist.
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