Q. My mother died leaving four children as heirs under her will. Throughout her life, Mom lent money to her children but didn’t document the loan amounts or payments. Some of these loans were many years ago. Two of the children have lived out of state for many years. Are these loans supposed to be paid out of each child’s share of the estate? Can we agree to forgive them? Is interest included?
A. Unless the heirs agree otherwise, a loan to an heir is an asset of the estate and is typically applied against that heir’s share. However, there are a number of issues that can be involved.
It is often difficult to determine whether it was a loan or gift, and if a loan, whether it was forgiven. This can be a difficult factual issue to resolve and may lead to conflict, even litigation.
If there is a document specifying an interest rate, it will apply. Otherwise, unless stated to be non-interest bearing, a loan in Idaho bears interest at the rate set annually by the secretary of state.
If the loan is too old, it may not be enforceable because of the statute of limitations. On an oral obligation, the statute is four years; on a written obligation, it is five years. Both are measured from the final due date of the loan. Frequently, loans of this type are so old that the statute of limitations makes them legally unenforceable.
One other factor is the “tolling” of the statute of limitation. When any payment is made, the statute of limitations time starts over. While the borrower is out of state, the statute does not run. This can result in an older debt still being enforceable as an asset of the estate.
It is important for the person drafting the will to make clear whether money paid to children is 1) a gift or loan, 2) if a loan, whether it is intended to be considered an asset of the estate and charged against that child’s inheritance and 3) whether it is interest-bearing, and if so, at what rate. Also, if the person making the will wants the loan to be considered as part of the child’s share even if the statute of limitations has run, there should be specific language in the will to that effect.
If a loan is legally owing or designated to be subtracted from an heir’s inheritance, the amount of the loan is added to the other assets before the percentage distributable to each heir is computed. The amount the heir owes is then subtracted from his or her share of the estate.
This situation can be extremely sensitive, destructive to families and expensive to resolve if a person’s will isn’t clear as to the intent.