Parents often provide financial help to their children during their lifetime, whether to help them enter the property market, establish a business or manage a significant expense. In many families, that support is given informally and without much thought to what happens if the parent dies before the arrangement is repaid.
When there is little or no documentation, the executor may later need to determine whether the payment was a loan, a gift or an advance on inheritance.
That distinction can affect how the amount is treated when the estate is administered and what each beneficiary ultimately receives. Once the person who made the payment is no longer there to explain what was intended, resolving that question can become far more difficult.
The presumption of advancement
Where the presumption of advancement applies, a transfer of property from a parent to a child or from husband to wife may be presumed to be a gift.
If the executor wants to establish that the transfer was instead a loan, they may need to show that there was a clear understanding at the time that the value of the property transferred would be repaid.
Evidence can include a written loan agreement, a repayment history, security over the debt or other records created when the property changed hands. The evidence available can ultimately determine whether the estate is able to establish the transfer as a loan and recover the amount owing.
When a family loan can no longer be recovered
Even where the terms of a family loan are clear, the right to recover the debt through the Courts does not continue indefinitely.
In NSW, an action to recover a debt arising under a simple contract is generally subject to a six-year limitation period under section 14 of the Limitation Act 1969 (NSW). When that period starts to run will depend on the terms of the arrangement and when repayment became due.
This can become an issue where a family loan is left unpaid for many years without any action being taken. By the time the lender dies, the executor may find that the debt can no longer be recovered through the Courts because the limitation period has expired.
A different limitation period can apply where the loan is documented by deed. An action based on a deed generally has a 12-year limitation period under section 16 of the Act, compared with six years for a simple contract.
For families making long-term loans, it is important to consider when repayment will be due and how long the debt will remain enforceable.
Accounting for an early inheritance
Sometimes a parent may choose to give one child part of their inheritance early for their own personal or financial reasons. If they still want the estate to be divided fairly later, that earlier benefit needs to be taken into account when the remaining assets are distributed.
For example, if one child receives $100,000 during the parent’s lifetime, simply describing it as an advance on inheritance may not be enough to reduce what they later receive under the Will. Without an appropriate equalisation or hotchpot clause, they may still be entitled to their full share of the remaining estate.
An equalisation clause can address this by requiring the earlier payment to be factored into the beneficiary’s final entitlement, helping ensure the distribution reflects what they have already received.
Practical steps for parents making family loans
- Put the arrangement in writing when the money is transferred, including the amount, any interest and when repayment is due.
- Decide how the loan should be treated if the parent dies before it is repaid. The Will should make clear whether the amount is to be forgiven, repaid to the estate or reflected in the beneficiary’s final entitlement.
- Keep supporting records, including bank transfers, repayment history and any security documents, with the estate planning records so they can be located easily by the executor.
Practical steps for executors administering an estate
- Review bank statements, tax records, correspondence and any available loan documents for evidence of lifetime advances, repayments or acknowledgments involving beneficiaries.
- Where an old family loan appears to remain outstanding, check whether any limitation period affects the estate’s ability to pursue repayment before taking further action.
- If beneficiaries disagree about how an informal loan should be treated, a Deed of Family Arrangement may provide a way to resolve the issue by adjusting the distribution from the estate, without requiring the dispute to proceed to litigation.
Getting advice
Family lending can have lasting consequences for an estate, particularly where the arrangement has never been formally recorded or the Will does not clearly address how it should be treated.
Clear documentation can help establish whether the money is repayable, how it should be treated on death and what the executor is expected to do if the arrangement is still outstanding.
At Aubrey Brown Lawyers, our Wills & Estates team can assist with documenting family loans, incorporating lifetime advances into estate planning and advising executors where the treatment or enforceability of an existing arrangement is unclear.
