Estate Planning Nightmares: What Happens When You Lend Money to Your Children, and They Don’t Pay It Back?

In today’s economic climate, it is getting harder for young adults to achieve financial stability without help from their parents.  The gig economy has supplanted jobs that provide health insurance and paid leave, and homeownership is drifting farther and farther out of the reach of most working people.  Maybe you even read that depressing article about how the lifestyle depicted in The Simpsons is now considered aspirational.  An increasing number of parents who are planning to retire soon or who have already retired continue to provide financial support for their adult children.  The subject of giving your children money because they need it and not because your wealth and generosity are boundless can be an uncomfortable one, so parents often speak of lending money to their children.  The cases where the parties sign a formal loan agreement.  Too often, the repayment terms are vague, and sometimes the loan is simply a polite fiction.  If you have lent money to your children, or if you plan to do so, contact a Central Florida estate planning lawyer.

How Loans to Your Children Affect Your Estate Plan: What to Do

It might be awkward to make your son or daughter sign a paper promising to pay you back, but if you don’t, you are leaving the door open to disputes over repayment.  In the loan agreement, you should specify the terms under which you will forgive the loan.  You should also specify what will happen if part of the loan remains unpaid when you die?  Will the loan automatically be forgiven upon your death, or will your child owe the rest of the money to your estate?

When Your Children Do Not Pay the Loans: A Cautionary Tale

At first, it seemed like Thomas and Mary did everything right with their loans to their children.  When each of the children married, Thomas and Mary gave him or her a loan equal to the down payment on the house the newlywed planned to buy.  Thomas outlived Mary, and by the time he died, three of the children had repaid their loans.  Thomas and Mary had been generous beyond their means, though, and when they died, they left behind many debts, which creditors tried to collect from their estate.  The estate sued their son Robert and their daughter Dory, who had not repaid the loans in full by the time their parents died.  The aim was for the estate to use the money collected from Robert and Dory to satisfy the deceased parents’ debts.  Robert agreed to have the amount he owed deducted from his inheritance, but Dory refused, and her refusal caused a rift with her siblings.  The way to avoid this problem is, of course, to be as detailed in formalizing financial plans and loan agreements as possible.

Contact an Attorney for Help

Giving your children money while you are alive is generally good practice in estate planning law, but a Clearwater estate planning lawyer can help you get all the details right.  Contact William Rambaum for help.

Resource:

theatlantic.com/ideas/archive/2020/12/life-simpsons-no-longer-attainable/617499/