Lending money to family: The impact on estate disputes

It is not uncommon for family members to rely on each other for financial support. Sometimes, people may not be in a position to borrow money from a bank or other financial institution.

We commonly think of such agreements between family as being less formal and more convenient than other arrangements, and rarely take into considerations issues that may arise at a later stage.

Often, however, money being lent between family and friends can have unexpected legal implications at a later stage in time, particularly when one of the parties involved in an agreement passes away.

It is therefore important to understand what your rights and obligations are as both a lender and borrower, in addition to how any such transactions may impact upon any potential estate disputes in future.

Money lent: loan or gift?

On its face, the distinction between a loan and a gift appears to be one that is easy to make. The primary issue at hand is whether the person giving the money intended for the recipient to repay it. However, when the relationship between these two parties of a non-commercial nature (particularly when it is a family relationship), the distinction is less obvious.

Disputing whether money that had been loaned or gifted between a person and the deceased may potentially result in a dispute between that person and the executor of the estate.

There is often a presumption when money is exchanged between close friends or relatives that a gift has been intended. It is therefore beneficial if the true intention of the exchange was to be a loan, to have a valid contractual loan agreement agreed between the two parties.

Whilst this is often awkward, it can aid in preventing estate disputes later in time.

What happens to a loan when someone passes away?

When a person dies, all their assets, both tangible and non-tangible, make up their estate. This is also true for any debts and liabilities.

If someone was owed money by the deceased at the time of their passing, it becomes an asset of the estate. The executor of the estate will ensure that debt is paid with the estate funds. If there is an insufficient amount to repay any debts, the executor may be required to liquidate estate assets to ensure such debts are paid, and if their remains inadequate provisions for creditors the executor will be tasked with notifying them as such.

Likewise, if someone owed money to the deceased, money will be collected by the executors on behalf of the estate.

What if I owe money to an estate but I am also a beneficiary?

There will be occasions where the person who owes money to the estate is indeed also a beneficiary of the same estate. For example, you may have taken a loan from a relative or a close friend, and they have listed you as a beneficiary to their assets.

It may then seem futile in repaying that money when you will then receive that money at a later stage. The executor of the estate is, however, subject to strict legal duties that must be carried out, including the receipt and payment of all debts before estate assets can be distributed to listed beneficiaries.

It is not uncommon for executors and beneficiaries that owe money to an estate to arrange separate agreements as to how such debts are to be repaid. For instance, they may arrange for the amount to instead offset your entitlements under a will, or that any outstanding amounts instead be paid in instalments over time. If such arrangements are to impact upon other beneficiaries, however, their consent will be required.

Estate disputes and factors to be considered in making family provision orders:

It is also possible that the lending of money will have an impact on decisions relating to claims for further provision -i.e., when an eligible person has been either left out of a will or believes that an amount provided for them is insufficient.

Family provision claims are explained in greater detail in this article.

Section 91A of the Administration and Probate Act 1958(Vic) outlines factors that are to be considered by the court in the making of family provision orders.

Sub – section 91A(2)(i) whether the eligible person was being maintained by the deceased before that deceased’s death and , if relevant, the extent to which and the basis on which the deceased had done so.

A factor that courts have considered when deciding on eligibility for further provision is the ‘financial dependency’ of a claimant upon the deceased.

Joss v Joss [2020] VSC 424 is a recent demonstration of the Supreme Court ensuring that an eligible person that has been financially maintained by a deceased is not left without adequate provision upon their passing.

In this case, the relationship between the claimant and her father had broken down significantly. She had become estranged from her family for around 20 years, however throughout this period her father continued to give her financial assistance. Despite having made minimal provision for her (relative to his quite large estate), she was able to successfully dispute the estate and claim further provision valued at $3,225,000. The court found that the financial contributions that had been made over time allowed her to become financially dependent upon him, among other factors, and outweighed the estrangement between the parties.

Subsection 91A2(2)(g) Any contributions (not for adequate consideration) by the eligible person to building up the estate or the welfare of the deceased or the deceased’s family.

This factor has often been considered by courts to refer to a spouse that has contributed non-monetarily in the accrual of the estate. However, providing financial support to a person who later does not provide for you in their will could potentially be an influencing factor upon the success for a claim for further provision at a later stage.

Other factors in estate disputes

Although the legislation does not expressly refer to money lent between parties as a factor to be considered in family provision claims, it could be an influence upon other factors referred to in section 91. For example, having lent or borrowed significant amounts of money could be important in determining the financial circumstances of the eligible person as per section 91A (d). Similarly, it could play a role in demonstrating the relationship between the eligible person and the deceased.

The best action, therefore, when seeking advice regarding contesting a will or defending a will, is to talk to an experienced estate lawyer and find out the impact of money lent may have on such a dispute.

 Contact us about an estate dispute

If you or someone you may know has been left out of a will or believes that you have received less than what you are entitled and find yourself in an estate dispute, please do not hesitate to contact the team at Hentys Lawyers today.