Debts Owed by Beneficiaries in an Estate Plan

October 27, 2011 by Scott C. Soady

Given the state of the economy, many people are giving loans to their children. While it is very generous of parents to loan money to their children, it can create several problems down the road. Most parents give money to their children but do not expect to ever be paid back. Even if the parents expect to be paid back many children do not make any payments on the loan or they consider it a gift that does not need to be repaid. This can can cause tension and resentment between those children who did not receive a gift or loan from their parents and those who did.

It also causes problems after the parents have passed away. Typically, the child who did not receive any money will expect their siblings share of the estate to be reduced by the amount of the debt. The child who did receive the money usually will say that the money was a gift or that it was paid back a long time ago. If disputes arise, it would be up to the probate court to resolve them.

If you do want to loan money to your children it is important to have the amount of the loan and the interest in writing. If it is not in writing, it is important to keep evidence of the amount that was loaned and whether any payments were received over time. The biggest problem occurs when the child stops making payments on the loan. The law has a statute of limitations, meaning that a claim for money must be brought within a specific time period. The statute of limitations on loans is six years after the due date of the loan. Therefore, if a child does not pay on a loan, the parents have to enforce the loan within six years of the last payment due date. Most parent will not sue their children for not paying on the loans while they are still living and thus the claim to the money by the parent's estate will be barred by the statute of limitations.

The existence of the loan usually does not come up as an issue until after the parents have passed away. The administrator or executor of an estate or trustee of a trust, is charged with collecting all the assets belonging to the estate. A loan is an asset of the estate; however, the administrator can have difficulty collecting on the loan if the statute of limitations has expired.

One solution to this problem is for the parents to update their estate plan whenever they loan money to a child or beneficiary of their estate. The parents would state in their will or trust that the child’s share of the estate is reduced by the amount of money currently owed to the parents. In Cook v. Cook, 177 Cal. App 4th 1436 (2009), the court held that the testamentary intent overcame the normal statute of limitations that would apply to loans. As always, it is important to ensure your estate plan is updated and to consult with an attorney about your estate plan.