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How to Handle Gifts or Loans to Children in a Will or Trust

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Most people help their children when their children need help, even when they are adults. Sometimes that means making “loans” to them. You should think about how to handle gifts or loans to children in a Will or Trust. Your family will thank you for it!

Imagine that your son’s car breaks down, and he needs a car to get to work. Student loan debt and the cost of living puts your daughter behind on rent. Your child’s young family struggling to make ends meet can’t make the mortgage payment. You naturally want to step in to help out.

Parents often step in to meet some immediate need their children have. In those moments, a parent may not think about clarifying the intentions of the “loan”. Parents are just reacting to the need. Those conversations can be awkward, and sometimes parents or children make bad assumptions.

Nothing is put in writing. Intentions don’t get clarified at the time (or maybe never). It becomes an unspoken “thing”. Your children may be hoping it’s a gift, while you may be hoping your kids will “do the right thing” and pay it back when they are able.

Whether the motivation is simply wanting to help the child who is struggling, or guilt or maybe even fear for the future of that child, parents often find themselves helping one child more than the others. The other children often know about it and may silently (or not so silently) resent it.

Clarify Intentions Upfront

The best time to clarify a parent’s intentions, of course, is when the gift or loan is made. You can do that simply by putting it writing, but people often don’t think about those things in the moment. Families are rarely that “businesslike”.

Sometimes parents vacillate. They hope the money will be paid back; they confide in someone (maybe another child) that they wish it would be paid back; then they decide it isn’t worth bringing it up again (when it seems evident it isn’t going to be paid back).

Sometimes, the money is given with a clear statement of expectation that it will be paid back, or the child promises, “I will pay you back when I can.” As time goes on, however, it doesn’t get paid back. Memories fade. Years go by.

Ambiguity Creates Problems for Your Estate
Any ambiguity will create problems for your estate. At best, your family may be uncertain what you intended and how they should deal with the money you provided to your children during your life. Your children may all have different ideas about it, but it only takes one child to dig their feet in to cause a real problem.

In the worst-case scenario, the question needs to be resolved in court at great expense to your family. Even if your family isn’t willing to call in attorneys, resentments can creep in that last for years and destroy family relationships.

One of the primary goals of doing estate planning is to make your intentions clear. if you make your intentions clear, your family does not have to guess at your intentions. Even if someone of them don’t like it, making your intentions clear eliminates the ambiguity that leads to arguments and, sometimes even litigation.

Default Rules

In the circumstances in which the intention of the giver is not clear, the law imposes default rules to help resolve the ambiguity. The purpose of the default rules is to establish a base assumption for the purpose of resolving disputes. It is a starting place.

When a parent gives money to a child, for example, the law presumes it was a gift. Money transferred from spouse to spouse is also presumed to be a gift. Money transferred from child to parent, however, is presumed not to be a gift.

The default rules are presumptions that can be overcome if evidence to the contrary exists. It is just a starting place. A layperson might assume that the evidence to overcome a presumption should be simple, but that is almost never the case.

The Evidentiary Problem

The evidence in these situations is usually something mom or dad said. (If it is written down, we wouldn’t be talking about presumptions.) If mom or dad is gone now, the rules of evidence do not allow an “interested person” (someone who has a stake in the estate) to testify to what mom or dad said. That includes the person to whom the money was given and all the other family members who are heirs or who are named in the Will or Trust.

Why? Because mom or dad aren’t around to confirm or deny what was said. It’s hearsay (which means it can’t be affirmed or denied by the person who allegedly said it). It’s inherently unreliable evidence. Therefore, the rules of evidence do not even allow it to be considered.

That means that the default rules often become the resolution of the matter. Without contrary evidence that is admissible in a court of law (like the statement from a non-interested person, like a financial planner, or a neighbor), the legal presumption is all a judge has to go on to settle the dispute.

Clarify Your Intentions

More importantly, you don’t want to put your family in the position of having to guess or fight over what you intended. Even if your family relationships are good, you don’t what to add uncertainty and confusion to the stress and sorrow they feel about your passing.

The way to avoid these issues for your family is to make your intentions clear. Even if you didn’t make your intentions clear when you provided the funds to your children, you can clarify everything in your Will or Trust.

Resolving the Intention Problem

Ultimately, it doesn’t matter what you intended or didn’t intend during your life. You control how your estate will be handled by doing a Will or a Trust and making your intentions clear.

Even if you gave money to a child with the clear intention that it be paid back, you can forgive the loan. (You should do that expressly if that is your intention.) Even if you gifted money to your children, you can make adjustments in your estate planning to even out the gifting that you provided them during life.

If you have made gifts to your children during your life, the important thing is for you to think about it and to address it.

Even if your children are not ultimately happy with what you choose to do, they won’t have opportunity to fight about it if you make your intentions clear. You will be doing them an enormous favor just by stating expressly and clearly whether you are forgiving those “loans” or making adjustments for the “gifts” you made during your life.

If you haven’t done your estate planning or need to review and revise what you have done, we would be glad to help you with it. Give us a call at 630-523-0543 or email [email protected] to get started.

Kevin G. Drendel
Drendel & Jansons Law Group
111 Flinn Street
Batavia, IL 60510
630-406-6179 fax
[email protected]

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