Handling the Issue in Trust
Many times an Estate Planning Client comes into the office saying that their children, grandchildren or another person (maybe the gardener) owes them money. Sometimes it is only a few hundred dollars, but other times it is hundreds of thousands of dollars. The loan could have been for a car, down payment on a house or business. Under the best of circumstances, there is an actual promissory note, but most of the time; it is just a verbal agreement.
If the loan is not large and you will not need the money in the future, we recommend that you try to cancel the obligation before your death and making any necessary distributions to other beneficiaries to equalize treatment.
If it is not possible or desirable to forgive the debt prior to your death, the debt and disposition of the debt should be specifically addressed in the will or trust. There are 2 specific issues that you need to be aware of with regards to addressing a debt in a will or trust. First, your financial situation may be very different at your time of death than it is today. If you forgive a home loan secured by a Deed of Trust to son in your will, but your son dies before you, what will happen with the loan? Is it your intent that the beneficiaries go after the owner of the property to pay back the loan? Second, what are your intentions if there are not sufficient assets to equalize payments to other beneficiaries based on the loan made to one beneficiary?
Loans to children or other people can be a tricky issue in estate planning. If it is your intention that any loans be canceled upon your death, you should specifically list the borrower, the amount and date of the loan. In addition, you should indicate whether any estate or inheritance taxes attributable to this forgiveness of debt shall be paid by the individual or is a charge against the estate. Another alternative is to provide that the debt is an offset against that person’s share of the estate. However, if the debt is large and there are not sufficient assets to equalize a distribution to other beneficiaries or make any other distributions called for under the terms of the will or trust, the question of the balance still due to the estate on the loan should be addressed.
In conclusion, it is a great thing that parents are able and willing to help their children, grandchildren or other people. However, failure to address assistance given in a will or trust has caused numerous problems among beneficiaries. It all goes back to “he or she is getting more….” In order to avoid this problem, I strongly urge you to review your will or trust and see how any loans or advances are handled.
If you have questions about your will or trust, I would be happy to review it with you at no charge. I see people every day for a FREE 30 minute consultation in Walnut Creek and Brentwood.
This article provides only general legal information, and not specific legal advice. Information contained is not a substitute for a personal consultation with an attorney. LAW OFFICE OF JOAN M. GRIMES, PHONE (925) 939-1680 191 SAND CREEK ROAD, SUITE 220, BRENTWOOD, CA 94513 © 2014 Joan Grimes