For some reason, loans to children and grandchildren frequently start out as a symbol of the love and affection between the parties but end up deteriorating to become a bone of contention and a real sore spot for both sides of the transaction. All too often the dissension arises because no one really knows what, if any, are the terms of the loan.
Maybe Timmy is hoping that his parents will eventually forget about the debt and his parents on the other hand are wondering whether Timmy, who seems to enjoy his fancy sports car and his all-inclusive vacations, is ever going to pay them back.
Here are a few matters you may wish to consider before you dig into your wallet to bail out one of your children.
Firstly, if the monies are to repaid as loan, then say that in writing at the time you advance the proceeds. Further, why not stipulate exactly what interest rate applies and how the monies are to be repaid. Please do not state that the monies are to be repaid when convenient for Timmy, as that term is uncertain and difficult to enforce. Make sure that the written loan agreement is dated and signed by the recipient. By dealing with these issues up front, you are going to avoid a lot of unnecessary confusion and turmoil down the road.
If a loan is going to be made to an adult child to be used with his or her spouse, consider making that spouse a party to the loan agreement as well. In the event of divorce or separation, the estranged spouse may very well deny that any loan obligation exists if it is not in writing. Further, that person may otherwise allege that it is your child’s sole debt.
Be mindful that in many cases, according to our British Columbia Limitation Act, a six year limitation period will apply to the debt. In other words, unless an acknowledgement of the debt or payment is made, which postpones or extends the running of the limitation period, you and your estate could be statue barred from commencing an action to collect the debt after six years, leaving you or your estate with nothing but a broken promise.
You should consider how the debt applies in relation to your Will. For example, do you wish the debt to be taken into account before the recipient takes any share of your estate pursuant to your Will or do you wish the debt to be forgiven upon your death? The choice, of course, is yours to make. Whenever your decision, you should make it clear so no one has to second guess what your intentions are. Further, you should remember that you may have other children that you will have to consider in determining how any unpaid debt is to be handled upon your death.
Finally, do not be afraid to say “NO!” In the course of my practice, I have seen many senior couples whose retirement monies took a lifetime of hard work to acquire being left virtually desolate as a result of the squandering of their monies by one or more of their children. You should really consider whether you can afford to take the risk of loaning monies, which comprise your required retirement savings, to anyone.
Money is always a difficult subject to discuss with family and children alike. However, when the time comes in which you want to help out one of your children or grandchildren by making a repayable loan, you are far better to get over your shyness on the subject and make sure that everyone knows exactly what the terms of your loan arrangement are. If you do that, your relationship with your child or grandchild as the case may be, is far less likely to be tarnished by those financial arrangements.
A lawyer can help you to understand the wide range of issues that arise with the preparation of loan documentation and the effect a loan will have on your estate plans. If you would like advice or for more information regarding such matters please contact Chahal Priddle LLP to set up an appointment today.