Debts owed by beneficiaries

In the ebb and flow of family life, very often parents give their children money or other assets. Most consider these transfers as gifts. Sometimes, families consider these as loans and some form of loan document is prepared.

Occasionally, however, a parent decides that a payment or series of payments should be treated as loans. This often happens if the payments have diminished that parent’s own assets to the detriment of the parent or to the rest of the family. But this may not have been not communicated by the parent to the recipient.

So when the parent dies, how is this “loan” addressed?

The executor of every estate is mandated to gather in the deceased’s assets and pay out the deceased’s debts before any payment is made to any beneficiary. One can see that a problem may arise if the executor considers the deceased’s transfer to a family member as an asset of the estate and therefore attempts to collect the loan from that family member while, at the same time, the family member alleges that the loan was actually a gift. A corresponding problem may also arise if the executor does not consider the transfer as a loan and makes no effort to collect same in the face of clear evidence that such a loan exists.

Evidence of a loan must either be in writing or be otherwise provable, such as through a family and non-family testimony. A simple statement in a will that “I have loaned money to my son John” will not be sufficient without other evidence of such a loan. In such a case, the “loan” will only be recovered by the executor if John is prepared to acknowledge that such a loan exists.

The solution in these situations is to ensure that if a parent does make a payment to a child and considers such a payment as a loan, this payment should be acknowledged in writing by that child. Clearly, this is easier said than done.

The alternative, however, is entering into litigation over the existence and collection of this loan. This usually has a tremendous impact on the entire family, not to mention the estate assets, which may then be used to pay for the litigation.