Family and friends often make loans to each other to provide financial assistance when they need it. If the lender dies prior to the repayment of the debt and the paper trail is not transparent this can create a difficult situation.
Our recommendation in this situation is always to seek the advice of an expert if you unsure. It is always better to know where you stand rather than making an assumption, particularly as you may unwittingly open yourself to litigation.
Below we have outlined three scenarios where some confusion may arise regarding unpaid loans after the death of an individual.
Do I have to repay a loan made to me now that the Lender has died?
If you have received a loan from a relative during their lifetime, when that person dies, the loan must be repaid. If you, the borrower, are entitled to a share of the Estate in any event – perhaps you are the deceased’s child – you will receive your share of the Estate after deducting the amount of the loan. If the loan amount is more than you are due, you will need to repay the balance.
I am an executor. I would like to write off the loans made by the deceased in his lifetime. Is this possible?
Executors do not have any choice in this matter. They are obliged to collect in the assets (including all loans), repay any of the deceased’s debts, pay expenses and inheritance tax before dealing with the beneficiaries. The loans are assets of the estate. If the executors decide that the loans do not need to be repaid, they will be reducing the size of the estate and thereby impacting the amount available for the named beneficiaries in the will. They would undoubtedly be sued by the beneficiaries for their loss.
It is important to remember then that debts do not die when the creditor does, nor do they die when the debtor dies. Debts remain payable.
Is it possible for any loans that I have made to be forgiven on my death?
If you have made a loan that you would like to be forgiven on your death, it is important that it is made clear in your Will that if the debt is still outstanding when you die it does not have to be repaid to your Estate. The loan will therefore convert to a gift on your death. A properly drafted will can ensure that there can be no debate about your intentions.
How can these issues be avoided?
From an executor’s perspective, loans made between relations or friends can be problematic in that there is often little paperwork to prove that the loan was made. It is often easy therefore for the debtor to claim that the loan was actually a gift.
The lesson from this is that if you are going to lend money to a relative or a friend you should put in place a signed agreement to confirm the terms of the loan such that your executors will then find it easier to enforce repayment. It is sensible to have an agreement in writing in any event so that both parties know its terms and everything is clear from the start. It is the vague arrangements that are far more likely to lead to problems on death rather than if everything was properly documented at the outset.