People in need can often turn to their loved ones for help, whether that be for emotional or financial support. A parent may loan you that money you need to pay off your student loan, or maybe a grandparent has given you some money to purchase your first home.
When you borrow money from a bank or another lending institution, you will sign a loan agreement, but when it comes to borrowing and lending money among family members, writing up a loan agreement may seem awkward and oddly formal, so you may avoid signing anything or even discussing repaying the loan altogether.
But what happens when the relative who has loaned you money passes away? How do you know if it was a loan that you have to repay, or merely a gift? What if you are also a beneficiary from their estate – do you have to pay anything back?
A person’s debts don’t just disappear when they die – whether they were the borrower or the lender. So it is essential for future certainty that everything is documented, gifts and loans alike, to protect your interests and the interests of the deceased’s estate.
What is a Deceased Estate?
When someone dies, all of their possessions, property, assets and money make up their estate. Debts form part of the estate also, whether they are payable by or to the estate.
Suppose the deceased owed a debt at the time of their death. In that case, it will be treated as a liability of the estate, and the executor or administrator of the estate will be responsible for repaying it using the estate’s assets.
If the deceased were owed a debt by someone else at the time of their death, it would be treated as an asset of the estate, and the executor or administrator of the estate will be tasked with collecting the debt on behalf of the estate.
So, debts don’t simply die with the creditor or debtor.
Was it a Loan or a Gift?
If the deceased gifted you the money while they were alive, then it is not a loan and cannot be a debt owing to the estate.
However, without anything in writing, proving that you were gifted the money and not loaned the funds could be very difficult. They would rely upon witnesses’ recollection and interpretation of the arrangement if there were any.
Proving whether the money was loaned or gifted to you could very well lead to a dispute between yourself and the executor or administrator of the deceased’s estate, costing yourself and the estate money.
Although it is potentially awkward to sign a loan agreement with your parents or another family member, it will help to avoid legal disputes of this nature further down the track.
If you are a beneficiary of the estate, the deceased’s Will may instruct their executor to deduct the value of the loan to you from your share of the estate to ensure the loan is repaid and to ensure fair treatment amongst the beneficiaries.
The lender can also state in their Will that the loan doesn’t have to be repaid, or they can convert the loan into a gift, and as a gift, you would not be liable to repay the money to the estate on their death.
Do I have to repay a loan if I’m the beneficiary?
If you’re the deceased’s beneficiary, you may ask yourself, what’s the point in repaying a loan to a deceased estate if you’re going to get that money back anyway?
The executor or administrator of a deceased estate has essential legal duties that they must fulfil when administering the estate. It is important to note that the executor or administrator’s duties are to the estate, which is the beneficiaries as a whole. In order to ensure their obligations to the estate are fulfilled, the executor or administrator must ensure that they account for all of the estate’s assets and pay all of the estate’s debts and liabilities before they give the rest and residue of the estate to the beneficiaries.
The executor or administrator may insist that you repay any loans given to you by the deceased prior to making any distributions. Alternatively, they may come to an arrangement with you to offset any amounts payable by you to the estate, against the benefit you are entitled to receive. The executor or administrator could also enter into an arrangement for you to pay off any outstanding amount owing to the estate by way of instalments over a period of time. As this would impact upon the other beneficiaries of the estate, such an arrangement would need to be with the consent of the other beneficiaries.
So, when receiving money from a parent or loved one, it is vital that you put it down in writing and that everyone agrees on the terms under which the loan is given, and the circumstances under which it will be repaid.
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