From time to time, parents transfer money to their children to help them with their education, to buy a house or start a business, for example. Unfortunately, depending on their family structure and dynamics, as well as their estate planning objectives, there are some implications and decisions they should make at the time they agree to transfer the funds, particularly with respect to how it is to be treated on their death. In all cases, the estate trustee is obligated to the beneficiaries and creditors of the estate to arrange for the collection of any loans. Considerations in this regard include, but are not limited to:
1. First, parents should decide whether it is a gift or a loan and expressly state it as such to all who may be interested or share an interest in their estate on death or in the case of incapacity. Unfortunately, in some cases it remains a family secret kept from the other children that parents transferred funds to one child. Clearly, secrets are often harder to plan for, particularly as it may mean missed opportunity to capitalize on the benefits of discussing one`s estate plan with one`s family as outlined in this previous blog post: http://akellylaw.com/discussing-your-estate-plan-with-your-family/. There has been much litigation, including in estate contexts after the donor has passed away, to determine whether transfers were intended to be gifts or loans. If you are doing your estate plan or will with the assistance of a lawyer, be sure to mention it to the lawyer so that it can be thoroughly discussed and documented in their file.
2. Parents should consider how they wish to treat the existence of such a transfer in dividing their estate with any other children they may have. Should they wish to treat the transfer as an advance on that child`s inheritance, it could simply be brought into account at the death of a parent, sometimes referred to as a hotchpot clause. This effectively means that the value of the transfer would be deducted from the share of the estate that child would otherwise receive. There is a real advantage in doing as opposed to treating it as a loan owed to the parent at death, in that a loan owed to the estate is considered an asset on which estate administration tax is payable if a Certificate of Appointment of Estate Trustee is being sought. However, if the transfer is simply treated as an advance to be brought into account when dividing the estate on a parent`s death, it would not be considered an asset which would attract estate administration tax.
3. If it is decided that the transfer is to be loan, it is strongly recommended that it be documented, ideally from the outset or, if this was not contemplated at that time, later is better than never. This is recommended especially if the loan is not intended to be forgiven on the death of the donor. All relevant terms of the loan should be clearly set out in a written agreement or other debt document, including interest rate, default and payment terms. If relevant, an amortization schedule should also be prepared and agreed upon. These should be reviewed and executed by the parties, preferably with the benefit of independent legal advice. The lawyer should discuss what should or will happen at the time of default, remedies for enforcement and the deadlines for any litigation in this respect. And, of course, an appropriate paper trail of all payments should also be kept.
4. Depending on the amount of funds transferred, it may be prudent to register a mortgage secured against real estate the child may own. One should note, however, that a mortgage in which the deceased is the mortgagee (the lender) cannot normally be called in simply because he or she died unless this is a term of the mortgage (loan) agreement. In such cases, it may be necessary to assign the mortgage for value or, possibly to assign it to one or more of the beneficiaries in satisfaction of his or her gift under the will. Regardless, the Estate Trustee should instruct the mortgagor (borrower) to make future payments to the estate until otherwise directed. It would be reasonable for the mortgagor to request proof of death and proof of the Estate Trustee`s appointment.
The steps outlined in points 3. and 4. above may be tough exercises to embark upon for a parent who simply wants to help their dearly beloved child. However, depending on the family dynamics and parents’ objectives, it is prudent to consider all angles. These steps may be particularly wise when a child uses the loan to fund the purchase of a matrimonial home for which, on marriage breakdown, the son or daughter-in-law may seek a division of property, including that matrimonial home. These steps will help legitimize the loan such that it can be properly claimed and repaid to the parents in priority to and before any division of property takes place.
If you wish assistance in planning for a loan to a beneficiary or collecting a loan owed to a deceased person, please contact Andrea Kelly.
Andrea Kelly, Lawyer, has extensive experience in wills, trusts, powers of attorney and estate administration matters. She provides clients with a high standard of timely professionalism and expertise, incorporating a very thorough fact finding process. This is quite often enlightening for her clients and facilitates individually tailored services. If you would like to know more, feel free to use the easy contact form or read Andrea’s bio.