Family and friends may often lend money to each other as a way of helping those they care about. But it can lead to acrimony and disputes when it comes to the matter of repayment. As Shakespeare put it: ‘Neither a borrower nor a lender be’ (Act 1 Scene 3, Hamlet).
But what happens to a debt when the lender has ceased to be?
When you have received a loan from a friend or relative who has died, do you still have an obligation to repay your debt?
Legally, is the loan repayable?
Generally, debts don’t just disappear when someone dies. This is the case whether the deceased was the creditor or the debtor (i.e. whether they loaned the money or borrowed it).
When somebody dies, all their assets, possessions, property, and money will form part of their estate. Debts also become part of their estate. A debt which the deceased owed to someone else is payable from their estate.
In principle, a debt which you owe to the deceased will be treated as an ‘asset’ of their estate. It is money or value which the estate has a right to. The deceased’s personal representatives will be responsible for collecting this into the estate funds. This will be part of their duties to gather together all the estate property.
To explain, the term ‘personal representatives’ covers executors and administrators of an estate. If the personal representatives were appointed in a valid Will then they are executors, or if no such Will exists, they will be administrators. The role of either kind of personal representative is broadly the same.
What if I am the only beneficiary of the estate?
This is all well and good as a matter of legal theory, but is it necessary to repay a loan to the deceased’s estate if you are the only beneficiary of that estate? After all, if you are going to receive all the deceased’s property anyway, what is the point of repaying the money if you are just going to get it back again when the estate is distributed?
Personal representatives have legal duties to the estates they administer. Their duties are to the estate rather than to the beneficiaries. Personal representatives must collect in all estate assets, pay any debts and tax liabilities the estate may have, and then distribute the remaining assets in accordance with the deceased’s Will (or the intestacy rules if there is no Will). This involves making payments on the estate’s behalf, keeping clear estate accounts, and generally acting in the estate’s best interests.
To ensure they are meeting these obligations, the personal representatives should insist upon the repayment of any loans. Estate accounts could be inaccurate otherwise. This may sound pedantic but, to fully and legally comply with their duties, personal representatives are entitled to, and should, demand the repayment of loans you received from the deceased (with interest sometimes as well), even if you are the sole beneficiary.
How do I know it was a loan?
It may be difficult to determine whether a payment to you was a loan or a gift. Gifts from parents to their adult children can be tricky to identify. Even something described as a loan may not really have been intended as such.
Without any kind of written loan agreement or documentary evidence, identifying whether a payment is a loan, or a gift is a matter of opinion or interpretation – a situation which can easily lead to dispute. For example, it would be in the interests of a beneficiary of the estate to argue that the deceased gave a loan rather than a gift, as that way the alleged loan would have to be repaid into the estate.
It is relatively rare for friends or relatives to draw up loan documentation between them. Legally speaking, however, it is advisable to draft some form of documentation for any loans you make, no matter how informal. Documents like this act as a record of your intentions and set out exactly what terms have been agreed. Doing so can avoid legal disputes in future.
Can I arrange it so that loans due to me are ‘written off’ when I die?
To avoid such difficulties happening to your loved ones when you pass away, you can specify in your Will that certain loans you may have made do not have to be repaid. This will convert your loan to a gift, which may have inheritance tax consequences if you do not survive the date of the ‘loan’ by more than 7 years.
For more information about inheritance tax, have a look at our factsheets.
You do not have to specify that a loan is to be ‘written off’, of course. You could also make mention of outstanding loans in your Will that you specifically wish to be repaid. This can give clarity to your executors as to your intentions.
You may also instruct your personal representatives to take any outstanding loans into account before they divide up the estate. This means, if someone you have loaned money to is a beneficiary of your estate, your personal representatives will deduct the outstanding loan amount from that person’s share before they receive it.
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