Putting Family Loans in Writing for Estate Planning Purposes

Every individual is happy to assist a family member when they need it the most and it often times comes in the form of a money loan. Although it may seem uncaring to have the terms of the loan put on paper, it can prevent a major feud from occurring amongst your heirs upon your death.

An estate accounts for all of theassets that have been accumulated over your lifetime. An undocumented loan could result in chaos when it comes time to make disbursements to your heirs, as it can significantly reduce each individual's share. A written loan allows each of your heirs to receive their proportionate share, with the borrower-heir receiving less than his pre-determined share, after taking into account their loan balance. This is the most fair and honest approach to any family loan.

A family loan that is given on your behalf should state all of the terms including the amount loaned, any applicable interest rate and the repayment period. An estate planner will also need to be advised of any family loans so that your estate can be properly administered. For estate planning to be effective, your current financial picture, including changes to your assets such as family loans, need to be disclosed to the planner.

If the estate is not aware of a family loan, it would be up to the courts to decide the circumstances and facts of the advance. A family loan that is not in writing can be destructive to a family unit when the loan is brought into question. The loan's existence and terms can become debatable. A family member could end up saying that they owe much less than what is actually due, or they may change the repayment terms to make the loan more favorable to them. This can cause ill-will and undue friction among family relationships, which could have been easily avoided had a written loan agreement been established.

When you loan a family member money, it is advisable that the terms are stated in writing to prevent any issues in the future. It may be difficult for both parties to do so, but it is much more difficult to ascertain what actually occurred when one of the parties dies.