Last week’s bulletin about family loans hit a raw nerve with Steve from Melbourne. 

A few years ago Steve’s dad loaned his brother, John, $80,000 to put towards buying a house.  John and his dad didn’t see any need to document their agreement.  John made regular repayments to his dad during the first year, but hit tough times and stopped paying.  Although John only intended it to be a temporary thing, there never seemed to be enough money left over after paying all of the other bills to start repaying his dad again.  John and Steve’s dad died suddenly about six months ago.  He had left a Will distributing all of his assets evenly between John, Steve and their two sisters but made no mention of the loan to John.  Steve and his sisters found out that the ‘loan’ did not form part of his Dad’s estate.  John received a gift of $80,000 from his dad.

This is the cold, hard reality of informal family loans.  If the person making the loan dies without documenting the agreement in any way then the loan is deemed to be a gift to the borrower and does not form part of the deceased’s estate.  The person who received the loan (in this case, John) could make arrangements with the other beneficiaries in the Will to address any extra benefit they had received, but they are not under any obligation to do so.  And, if money is tight this is unlikely to happen.  Families, favourites, money and death provide for an explosive situation.

By making an informal loan to John, his dad may have unwittingly been involved in setting off a bitter family dispute which could have even occurred during his lifetime.  If the terms of the loan to John were not at ‘arm’s length’ then Steve and his sisters might have thought that John received favoured treatment from his dad in getting the loan in the first place.  It may have been unclear whether their dad’s generosity or means would have extended to all four siblings getting the same loan with the same terms, including optional repayment!

A family loan agreement would have provided all parties, including other family members, with greater certainty and protection. 

Any loan agreement needs to set out key terms including the loan amount, the manner of repayment, interest charges (if any) and consequences of the borrower’s default.  These terms show that the lender is serious about the loan being repaid and that the borrower is serious about repaying it.  The significance of a documented family loan for other family members, such as in Steve’s case, is that it would have formed part of his dad’s estate. 

LawCentral has developed a loan agreement which covers all aspects that you need to think about when entering into a family loan agreement.  You can build this Loan Agreement now.

If, for some reason, Steve’s dad had thought about it but did not want a formal loan agreement there is another way to make sure the John did not benefit at the expense of his brother and sisters.  Platinum members can find out how.

It is really unfortunate that Steve and his sisters had to find out about this the hard way.  We hope others can learn from this and take simple steps to avoid such a situation which has the potential to create lasting family rifts.

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