By Bernard A. Krooks, 

Certified Elder Law Attorney

Special Guest Contributor: 

Joel Krooks

We all want to do right by our children.  Sometimes, even as adults, our children encounter cash flow issues and need a little help.  So, as parents we are often called upon to lend money to our children.  As lawyers, we hear similar stories all the time: parent advances money to a child and the child is not making payments on the loan.  So, the legal question is how should you handle loans in an estate plan?  Should the outstanding balance of the loan count against the child’s inheritance on your death?  Alternatively, do you wish to forgive the child’s loan on your death?

Let us start off by saying that there is no right or wrong way to do this.  You should do what is appropriate for you and your family.  There is no requirement that you make your beneficiaries repay loans, and there is no prohibition against doing so. You get to do what you want.  However, it is important for you to be clear in your estate planning documents what your intentions are.  Even if your children are getting along while you are alive, lack of clarity regarding repayment of loans may cause problems after your death; especially if the other children did not know about the loan or how much it was for.  Perhaps you did not actually “loan” the money at all.  Maybe you intended it to be a gift, with no strings attached.  Or maybe you intended to reduce that child’s share of your estate by the loan amount.  What about interest on the loan?  Perhaps you did not realize that the IRS may impute interest income to you on certain intra-family loans or may treat the forgiveness of certain loans as a gift.

Over the years, we have seen many different scenarios involving gifts or loans to family members.  For example, one client advanced his daughter Jenna $150,000 to help her make a down payment on her new home.  After she bought the home, she started paying back the money, even though the client told her she did not have to.  Another client paid his son Kyle’s college tuition, which amounted to over $200,000 over four years.  Kyle is now a successful businessman and although the parent never expected to be repaid, he was surprised that John never even offered.  So, what do you do? If Jenna were your daughter, would you reduce her inheritance by the amount of money, which was not returned, that you gave her to buy a new home.   If Kyle were your son, would you consider treating your payment of his college tuition as an advancement on his share of your estate?  These are tough questions that require deep thought and communication with all interested family members in order to minimize potential problems down the road.  Whatever you decide, you should consider adding language in your will or trust just to make things clear.

To make sure that your estate planning documents are clear with respect to your intentions regarding family loans, you should make sure your attorney knows about all loans or any advancements that could potentially be treated as loans.  To avoid unnecessary litigation, it is important for your documents to be precise. One of your children might not be happy if they feel that they were not treated equally. If you think on of your children owes you money, please tell us about it so that we may address it as part of the estate planning process.  If some of the loan has already be paid off, we need to know about that too.  Since these situations often change over time, you should make a point of keeping us up to date periodically so that your estate plan continues to reflect your most current wishes.

All too often, family loans end up under the category of “no good deed goes unpunished” and sometimes lead to family strife or worse, costly litigation among family members.  Do yourself and your family a favor, please be clear about your intentions and communicate those intentions to all necessary parties.

Remember, you can also structure the money to your child as a gift instead of a loan. You can gift up to $19,000 a year to your child without having to file a gift tax return. You can gift more than the $19,000 a year, but you will need to file a gift tax return and your federal estate tax exemption will decrease. In some circumstances, this may be a better option than a loan. 

Bernard A. Krooks, Esq., is a founding partner of Littman Krooks LLP. He was named 2021 “Lawyer of the Year” by Best Lawyers in America® for excellence in Elder Law and has been honored as one of the “Best Lawyers” in America since 2008. He was elected to the Estate Planning Hall of Fame by the National Association of Estate Planners & Councils (NAEPC). Krooks is past Chair of the Elder Law Committee of the American College of Trust and Estate Counsel (ACTEC). Mr. Krooks may be reached at (914-684-2100) or by visiting the firm’s website at www.littmankrooks.com.