New York Estate Planning & Elder Law Blog
Most people want to help their family members have everything they need. In fact, one of the main reasons to create a comprehensive estate plan is to make sure that you are able to distribute your assets in a way that provides the most security for your beneficiaries. During our lives, there are times when we have family members in need and may be in a position to help them. If we choose to do so with a loan, it is important that the details of that loan are written down and thoroughly understood by all parties involved in the transaction. Otherwise, there could be potential problems when it comes to administering your estate.
Pitfalls of Loans
One of the biggest problems with loans happens when the lender passes away, often unexpectedly. If there is an outstanding loan to a friend or family member, especially one that may also be a beneficiary, there is likely to be some disagreement over the terms of various documents within the estate plan.
For instance, let’s say you have two children. One of your children gets married and is expecting twins, but has just started his or her career and does not have the financial means necessary to purchase a home for their growing family. As a parent, you want to help you child but also want to make sure that they are financially responsible. You decide to give that child a loan, and there is nothing wrong with that.
The problem arises if you pass away before the loan has been repaid. Let’s say that unfortunately happens and you had designed your estate plan to distribute your remaining assets evenly between your two children. If you have a significant amount of the assets you had intended to distribute tied into the loan you gave to one of your children, then that will significantly reduce the size of your estate by the amount of the loan. That can negatively impact the child that did not take out a loan with you.
Additionally, even if a significant amount of assets remains in your estate, there is likely to be a challenge to the terms of your estate plan. Taking the same example of equally distributing assets between your two children, one child has still made out significantly better than the other because they were also given a loan that they no longer need to repay.
Suggestions for Avoiding Issues
This is a common pattern that happens more often than you might think. The players might be different, but the results are still the same. There is dissention, tension, and often challenges to how an estate is administered that can drain even more assets from your estate. You can avoid some of the negative consequences that loans and other financial transactions with beneficiaries can have by setting specific terms for those transactions.
For instance, you could include terms in the loan agreement that specify any outstanding amount of the loan principal will be deducted from any inheritance the individual that took the loan is to receive. You could also specify that any outstanding principal be paid back to the estate and determine terms surrounding such an arrangement. The more preparation you take now and the more attention that is paid to details that may not seem to be important, the easier the process of administering an estate can be. An experienced estate planning attorney can help you understand how to approach loans and other outstanding financial arrangements in your estate plan.