Estate Planning and Family Loans
In a tough economy it may become necessary for some parents to lend money to their children. Liza Horvath has recently published an article on http://www.montereyherald.com that deals with family loans and estate planning. With this article, I would like to add some thoughts from an estate planner's point of view regarding the intertwined issues of estate planning and family loans.
First of all it is highly recommended to keep loan agreements in between family members in writing. That is especially important - even though you trust each other - because if something happens to one of the parties a third party "professional" might have to figure out, what exactly the parties agreed on. Even more important, if you use a promissory note, both parties will know what they've agreed on (memory tends to fade over time). The written document will also allow to formally write off the loan for tax purpose if it is not repaid as initially intended.
The document should outline all the details of the loan, starting with the loan value and the repayment details (repayment schedule). The document should also contain a clause, the deals with the solution of problems between the parties that might arise in the future (arbitration clause). The document should be written clearly and unambiguously in order to avoid later disputes. If you don't feel comfortable with perfectly drafting such a document it is often a good idea to ask a lawyer to draft or at least to revise your document.
From an estate planning perspective it is also important to consider the loan with respect to your general estate plan. If you have for example a living trust that leaves all off the parent's estate to more than one child in equal shares, the prior loan to one child should be mentioned in the trust document to avoid later disputes that might end up court. You could for example regard the loan as irrelevant or alternatively deduct it from the debtor's share as far as it is not repaid upon the death of the grantor. The decision is up to the grantor. Either way, the living trust document should be updated. If you don't feel comfortable to update your living trust document yourself (see our learning center for living trust amendments), you should ask an estate planning attorney to do so.
