Family and friends often lend each other financial help when they need it. If the lender dies before the debt is paid off and the paper trail is not transparent, it can create a difficult situation.
Our recommendation in this situation is to always seek expert advice if you are unsure. It’s always better to know where you are than to make a guess, especially since you can unintentionally expose yourself to litigation.
Below we have outlined three scenarios in which some confusion can arise regarding unpaid loans after an individual’s death.
Do I have to repay a loan that has been granted to me now that the lender has passed away?
If you received a loan from a loved one 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 case – you may be the deceased’s child – you will receive your share of the estate after deducting the loan amount. If the loan amount is more than what is owed to you, you will have to pay off the balance.
I am an executor. I wish to write off the loans granted by the deceased during his lifetime. Is it possible?
Executors have no choice in this matter. They are required to cash assets (including all loans), repay all debts of the deceased, pay expenses and inheritance taxes before dealing with beneficiaries. Loans are assets of the estate. If the executors decide that the loans do not need to be repaid, they will reduce the size of the estate and thus affect the amount available to the beneficiaries named in the will. They would undoubtedly be sued by the beneficiaries for their loss.
It is therefore important to remember that debts do not die when the creditor dies, nor do they die when the debtor dies. The debts remain payable.
Is it possible that the loans I have taken out will be canceled upon my death?
If you have taken out a loan that you would like to be written off on your death, it is important that it be clearly stated in your will that if the debt is still unpaid when you die, it does not have to be repaid to your estate. The loan will therefore turn into a donation upon your death. A well-written will can ensure that there can be no debate about your intentions.
How to avoid these problems?
From the perspective of an executor, loans made between relationships or friends can be problematic as there are often few documents to prove that the loan was made. It is therefore often easy for the debtor to pretend that the loan was in fact a grant.
The lesson to be learned is that if you are going to lend money to a relative or friend, you must put in place a signed agreement to confirm the terms of the loan so that your executors will then have an easier time demanding the loan. refund. It is a good idea to have a written agreement in all cases so that both parties know the terms and everything is clear from the start. It is the vague arrangements that are much more likely to lead to problems upon death rather than if everything was properly documented at the outset.