Loans to Heirs Against Inheritances

Parents loan their children money against their inheritances for a variety of reasons, from buying a home or paying for college to helping during a financial crisis. The parent’s intent may be for the loan to be paid back, taken from that child’s share of the inheritance or forgiven upon the parent’s death.

Whatever reason a loan against an inheritance is made, it is imperative that the intent for how it will be handled is well documented. Otherwise, the confusion can cause dissension between heirs, leading to both bad feelings and litigation.

There are three questions to answer when giving money to an heir:

1. Is the money a gift or a loan?
2. If it’s a loan, should it be considered an asset of the estate to be charged against that child’s inheritance or forgiven upon the parent’s death?
3. Also, if it’s a loan, is it interest bearing, and at what rate?

Importantly, if the loan is meant to be repaid upon the parent’s death, the balance owed and repayment schedule should be documented and the Will must state that the heir’s share is to be reduced by the unpaid loan balance.

All these details must all be well-documented in the parent’s Will.

There are a variety of situations that can impact how a loan to an heir against an inheritance is handled after the parent’s death. These include:

• If the estate is deemed insolvent (not enough assets to pay all debts) by the Probate Court, this will affect how debts are repaid and in what priority.
• If the loan is to be repaid upon death, the immediate repayment of the entire outstanding balance may be required to settle the estate’s debts and other bills or costs.
• There may be tax ramifications to the estate for forgiving debt.
• A loan forgiveness provision may be challenged if it’s suspected that the loan was made with the intent to defraud creditors.

Clearly documenting in a Will how a loan to an heir should be handled can help avoid many complications when it comes time to distribute an estate’s assets. Discussing a loan to an heir with an experienced estate planning attorney can help sidestep potential tension between heirs and even court battles. Please feel free to call us at 833-888-0462 if you have any questions about loaning money to an heir against his or her inheritance.