You’re the executor of a parent’s or another loved one’s estate. They’ve left money to some family members, others they were close to and charitable organizations.
Your loved one was generous in life and death. You know for a fact that they lent money to one or more of your siblings who were struggling financially or to someone who helped take care of their home as they grew too old to do so. However, your loved one never bothered drawing up any documentation like a promissory note.
How do you handle these unpaid loans? Can you deduct the amount still owed from their inheritance? That’s tricky if the loan isn’t mentioned in the estate plan and there’s no other official documentation.
If you don’t distribute the full inheritance left to an heir or beneficiary because you know they owed your loved one money, you could find yourself involved in an estate dispute in probate court. The person who received the loan could say that your loved one intended for the loan to be forgiven if they died before it was repaid. They could dispute that there was a loan at all or claim that they’ve already repaid it.
This is why it’s always wise to draw up some official legal documentation of any significant loan you make to anyone — including family members. Keep track of repayments and interest payments, if any.
If you intend to forgive any remaining amount owed on the loan if you die before it’s repaid, note that in the documentation and in your estate plan. If you wish any remaining debt to be deducted from the beneficiary’s inheritance or the amount still due to be repaid to the estate, note that as well.
When the grantor of the will stipulates that a loan should be forgiven upon their death, that wish is typically honored unless the estate is insolvent, and the money is needed to pay bills or other expenses.
If you’re administering an estate where the collection of loans made by the deceased is required — whether or not those loans were documented in the estate plan or elsewhere — talk with your loved one’s estate planning attorney. If they didn’t have one, an experienced Indiana estate planning attorney can help you.