Family Loans and Gifts – Using the Will to Equalise the Benefits

Many parents of adult children often discover that although the children may have left the nest, the umbilical cord or supply lines sometimes remain firmly attached.

Some families adopt great discipline in this area, ensuring that any advance made to assist one child is immediately equalised with an identical advance to the others whether they need it or not.  For the most part though, limited spare cash and the inevitable timing differences in the fortunes and misfortunes of the children mean that benefits are provided out to the children unequally in answer to individual need as it arises.  When it comes to making a Will therefore, there are a number of issues that surround this topic and all should be considered:

• Was the money a loan or a gift? – The critical time for answer to this question is the time at which the money was advanced. If the money was given over with no agreed understanding that it was to be repaid then (by a concept called the presumption of advancement) the money is usually a gift and the recipient is entitled to retain it without consequence. For it to be a loan there must be an agreement that the money is to be repaid. Either way, it’s highly recommended that the agreement be recorded in writing at the time the money is handed over. If not then a retrospective agreement can be signed up at a later stage but with the money already in hand, the recipient of course may not feel motivated to sign.
• What were the terms of the loan? – If there was an expectation that the loan  needed to be repaid by a certain time or that there was to be interest charged upon the outstanding amount of the debt from time to time then this needs to be expressly agreed between the two parties. If interest was to be paid, was the interest supposed to be compounding or simple and at what rate was the interest to be calculated? If there is no mutual agreement between the parties on these matters then the loan will usually be taken to be repayable on demand and interest free.
• Guarding against allegations of forgiveness or set-off – a legally binding loan can still be extinguished if the parties subsequently agree to forgive it or for instance the borrower has made some other payment or provided some other benefit to the lender (for example paying the lender’s phone bill) which has been accepted in “set-off” against the debt. If there are benefits passing backwards and forwards between the two parties then it is essential that there be clear records to establish whether obligations for a payment have indeed been waved or set-off by something done in exchange.
• What if the debt has been partially repaid? – As with everything else, clear records to show that the money that might have been paid from debtor to lender has been accepted in partial reduction of the debt is critical to determination of this issue.|
• How can the loan be treated under the Will? – In the Will, it is important that the Will maker clearly sets out what the expectation is to be. The options are:
  • to, forgive the loan;
• direct the executors to count the loan as an asset and gather it in
• offset the entitlement against the debtors full estate entitlements; and/or eve sue the debtor to recoup the balance of the debt if the debt exceeds that beneficiary’s full entitlements under the estate once the loan has been counted in as a divisible asset. 
  • Are time delays between time of advance and the time of death relevant? – Yes. Under general principles of Contract Law, any “loan” advanced which is unspecified as to date for repayment is likely to be classified as a debt “repayable on demand”. By a combination of the 1956 High Court case of Young v Queensland Trustees and the Queensland Limitations of Actions Act, the creditor to any “On Demand” loan is barred from bringing any claim to the courts for enforcement of repayment of the loan any time after 6 years from when the money was advanced. This law however does not extinguish the debt and so conceivably it can still be counted as an asset under the will  and offset against the debtor/beneficiary entitlements however to avoid any problems it is highly recommended that the debtor should be made to sign a fresh acknowledgement to confirm that the debt is still repayable every 6 years.
  • Can executors be given the discretion to forgive the debt outright? – Yes. The Will can be drafted to give the executors this power but it is generally not recommended.
  • How are issues resolved between debtor and the executors if there is a dispute about how much is actually owed? – Just like any other litigation between people in disagreement, the matter has to go to the courts and is litigated as a normal civil dispute. There are obviously however difficulties with this since one party to the original loan agreement being the deceased is now no longer able to give evidence and consequently any deficiencies with the case can’t be rectified by that person giving evidence as to what actually might have occurred or was in their state of mind.

  Michael Zande is the Principal of Zande Law Solicitors, with 25 years experience in practice.  Michael and his team have had extensive experience in drafting of Wills and Administration of Deceased Estates.  Please feel free to review our firm and staff profiles at www.zandelaw.com.au

  The information in this article is merely a guide and is not a full explanation of the law.  This firm cannot take responsibility for any action readers take based on this information.  When making decisions that could affect your legal rights, please contact us for professional advice.