Do debts ‘die’ with the lender?

Questions about repaying debts following a death.

We often get questions about repaying debts when someone dies.

Do their debts have to be paid? If you received a loan from a relative who has died do you are have to repay the loan now they’ve passed away?

A question recently posted to our blog asked whether a loan from a parent has to be repaid even though the child is a beneficiary of the estate. 

Do debts ‘die’ when the creditor does?
Some people believe that debts ‘die’ when either the creditor or the debtor dies. This is not necessarily the case. Most debts remain payable.

A loan or a gift?
Sometimes a loan will be converted into a gift. If the loan was provided by a relative or friend they might state in their Will that the debt doesn’t have to be repaid to their estate. However, if the Will is silent about the loan, it will not automatically convert to a gift and it must be repaid along with any interest that has accrued.

Debts between relations or friends can be problematic. There is often little or no paperwork to prove the terms of the loan. If that is the case there could be difficulties in recovering the loan from the debtor. The borrower  might argue that the lack of paperwork indicates the intention of the lender was that the loan was actually a gift. I’ve come across this issue on a number of occasions when assisting clients.

The importance of documenting the debts 
I often find that debts incurred between relatives lead to disagreements if one party dies. So if you’re going to lend money or other assets to a relative or friend it’s wise to have a written agreement between the two of you. The agreement should confirm the terms of the loan.  Your personal representatives will then find it easier to enforce repayment if they need to. It’s sensible to have a written agreement anyway so that both parties are clear about the terms and conditions of the loan. 

Members of our BE My Own Lawyer service can access a template for a loan agreement that can be used for non-commercial loans. A non-commercial loan means a loan made between private individuals.

Of course, parents very often ‘lend’ money to their adult children without having any real intention of ever demanding that it should be repaid. The parents might refer to the money as a ‘loan’ because they want to encourage a sense of responsibility into their child or avoid other siblings getting jealous. Unfortunately, vague arrangements are far more likely to lead to problems after the parents have died than if everything was made clear from the start and properly documented.

Make your Will clear about debts
Your Will is also a good way to avoid problems about debts. If a parent dies while a loan to a child is still outstanding, it is easier for their executors to decide how to deal with such debts if the issue is covered in their Will.

Sometimes, the person who has received a loan from a relative will want the amount of the outstanding loan to be deducted from any inheritance they are entitled to receive as a beneficiary of the deceased’s estate.

However, unless the Will makes it clear that the beneficiary can keep the loan money in lieu of their share or the executors agree to that arrangement, the loan must be repaid. The borrower then receives their share of the estate in the normal way.

The executors may need to insist on a loan being repaid to the estate even if the borrower is a beneficiary. This is may be because the executors have payments to make from the estate in relation to debts the deceased person incurred or to pay tax or probate expenses.

It might sound pointless for the executors to insist on the repayment of a loan only to pay the money back out to the same person but it may be necessary in order to make sure the executors can balance the books correctly.

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Important note. The views expressed in this article are the writer’s own and do not constitute legal advice. Remember the law changes and information given in this article is only for general interest.