was it documented as a loan or a giftEstate planning and family loans: what could go wrong?!

Loans between members of the family, particularly between the testator and a beneficiary, may not exist at the time that estate planning is undertaken: if that is the case, the Will component of the estate planning documentation will not make specific reference to such advances that arise prior to – and remain unsettled as at the time of, death of the testator. The existence of such loans can cause family disharmony when the terms of the Will are being administered.

Consider the following hypothetical situation

Trust is not enough

Deirdre, a mother of four, living in a regional city in Queensland, loved all of her children equally: but the youngest, Barry, seemed to need more help than the others to make a go of things. When he wanted to buy a house, she loaned him the deposit of $25,000. Deirdre mentioned the loan to her eldest son, Charles. When Deirdre died Charles asked Barry what he was going to do about repaying the loan. Barry said that it was a gift from Mum and he did not have to repay it.

A range of issues arise out of this scenario, including –

  • Had loans ever been made to others of the children (and not repaid at the time of death)?
  • Was repayment of the loan critical to the liquidity of the estate to meet the bequests to Barry’s siblings?
  • Was Deirdre of appropriate mental capacity to recall the actual arrangements/ conditions for the advance?
  • Was the advance a gift or a loan? (Was Deirdre in receipt of Centrelink benefits and made a disclosure about the advance to that agency?)

The reader may be able to relate some of these questions to their own family situation – or may be able to suggest even more issues that would challenge Deirdre’s legal personal representative (the executor of her estate). The complexity (and potential disharmony) could be further exacerbated if the children were also the executors.

Have you made, or received a loan?

It is important that loans of money or property between family members and friends be formally documented. Failure to do so can lead to disputes which could last for decades. This is especially significant when it comes to the administration of a deceased estate. If you have been involved in the loan of any money or property to anyone, then you should consider what you want to happen to that loan in the event of the death of either of the parties involved:

  • Is it to be paid back? If so, upon what terms?
  • Is it to be forgiven? If so, in what circumstances?
  • How is the action to be taken to be communicated to the legal personal representative of the estate?

Documenting a loan

Documenting a loan does not need to be complicated. A few lines setting out the details of the amount of loan or the item of property and the terms of repayment or return are sufficient. In some States, stamp duty may be payable on the loan agreement. The document should be signed and dated by both the borrower and the lender.

The documentation should also include accounting for any transactions associated with the loan in accordance with that arrangement: matters such as interest payable, loan repayments made and any default events that may be pre-empted under the loan arrangement.

Where can I get help with Estate Planning?

The Continuum Financial Planners Pty Ltd Estate Planning service offers clients:

  • working with them to prepare the detailed information required for their appointed estate planning specialist lawyer; who can then
  • consider the client’s individual detail in light of their estate planning experience so as to design a plan appropriate to the client’s present and known likely circumstances; and where needed
  • provision of access to our referral connections of such professionals (to whom we are happy to refer you to match their expertise with circumstances such as your own).

To avail yourself of this service, contact our office (by phone, on 07-34213456; or our website Contact Us page) for an appointment with one of our experienced advisers.

As part of the preparation of the information to refer to a legal adviser (estate planning specialist) your experienced advisor at Continuum Financial Planners can help you to establish all of the relevant factors (including the status of documentation of various financial arrangements).

More about Estate Planning…

This is the seventh in a series of 13 articles on the topic of Estate Planning: further articles in the series seek to bring clarity to some of the issues and implications to be dealt with in fulfilling the three key considerations of Estate Planning – getting the right amount of money, to the right beneficiaries and at the right time; and to prepare you and your family to understand the final plan when drafted. The remaining articles consider –

(This series was first posted to our website over a period from late-2011 through early-2012; it has been refreshed, updated and re-posted in February 2015.)