Wills and repayment after death of loans to children

dontwanttodie

Keep_pedalling said:

OK, let’s image rear both of you get run over by a bus tomorrow and that you have £200k in assets making your total estate value £600k, so each sibling should get £200k. Each of the non debt children get £100k each and the other owes each of them £100k and gets no cash. That to me is the only fair way to do it and your wills should reflect that. 

Is this loan secured? If it was given to him to buy a property you should have a charge registered against it to protect the loan in case he goes bankrupt or gets divorced.

Do you own a home? If not your estate may have an IHT liability if you are unable to use the residential NRBs.

Yes, I understand all of that but the loan suited us at the time and was beneficial all round.
I don't believe our son would default on the loan.
We no longer own a home.

Keep_pedalling

dontwanttodie said:

Keep_pedalling said:

OK, let’s image rear both of you get run over by a bus tomorrow and that you have £200k in assets making your total estate value £600k, so each sibling should get £200k. Each of the non debt children get £100k each and the other owes each of them £100k and gets no cash. That to me is the only fair way to do it and your wills should reflect that. 

Is this loan secured? If it was given to him to buy a property you should have a charge registered against it to protect the loan in case he goes bankrupt or gets divorced.

Do you own a home? If not your estate may have an IHT liability if you are unable to use the residential NRBs.

Yes, I understand all of that but the loan suited us at the time and was beneficial all round.
I don't believe our son would default on the loan.
We no longer own a home.

People default for reasons beyond their control. Redundancy, ill health, bankruptcy and divorce are common reasons, which is why, if you can, you should secure the loan. What happens to the loan if he dies before you?

If your joint net worth including the loan exceeds £650k and you disposed of your home prior to the introduction of the residential NRB then IHT could be due on the second death which complicates things somewhat.

You need to sit down with a solicitor ASAP to get your wills sorted out. 

saajan_12

dontwanttodie said:

FlorayG said:

Unless the siblings are VERY close that's never going to work. Is the amount of the loan more than 1/3 the value of the estate? If so then you divide the available estate by three, give 2/3 to siblings, reduce the loan amount owed by the 1/3 value, give 1/2 of that 1/3 to each of the other two siblings (because if you hadn't loaned it, it would be available for them). Then the loanee has to pay back the rest by an arrangement decided between you

That's pretty close to what I was planning with possibly the liquid assets being paid out to all 3 and the do as you say. The loan is more than 1/2 the value of the estate but it was made at a time when it was convenient for us too.
The children are quite close but but no-one is perfect.

Sounds pretty different to me.. 
Say you had 400k and outstanding loan is 300k, meaning you have 100k in cash at the point of death. Each child should get 133k each, and the son should pay back the 300k. Son is paying back 15k a year off the capital (excluding any interest) so will take another 20 years. 

Option 1) Upon death, each child gets 33k from the cash, and son continues to pay off the 15k a year (5k to himself and 5k to each sibling) over the next 20 years. Effectively son is paying 10k / year and got an extra 33k early. 

Option 2) Upon death, the other two children get 50k from the cash, and son continues to pay off the 15k a year (7.5k to each sibling) over the next 11 years, at which point he'll be paid up their shares. He saves / pays himself the next 9 years worth of 15k payments which effectively adds up to his 133k inheritance. 

Personally I'd do option 2, as it gives the others the money soonest. Especially if there's no (or a low) interest on the loan, as they're actively losing out by getting the money later. Sounds like son is asking for option 1. 

dontwanttodie

DE_612183 said:

I think he is correct in his thinking.

If the loan had not been made your estate would be £400,000 ( for example ) divided three ways is £133,333 - so his debt is 266,666 not 400,000.

If the term remains the same then the monthly amount is less.

However I would suspect the best way to do this is get him to carry on making the payments - although half to each sibling but over a shorter period of time.

I'd also still get whatever his share is of the liquid assets paid against the outstanding loan - again in order to reduce the timescale of the loan.

I presume if the loan still has over 30 years left - if the worst happened now he'd still be looking at repaying for another 20 years even with the reduction.

Another point to make is that the debt will be passed to the siblings - they need to make note of this in their will - otherwise an executor may come asking him for the outstanding balance to be paid into her estate - and perhaps anyone else further down the chain.

Thank you. This discussion has been very helpful.
Basically, my plan is to allow him his cash share but then do as you suggest by reducing the amount of the loan by his share and reducing the term of the loan so he can continue paying as before but split between the two siblings. I just have to explain the fairness of it to him.

We will, of course be discussing it with our solicitor as well but I want to get it all straight in my head first and put it to all 3 children.

You've been a great help.

madbadrob

The upshot here is that the issue will be down to the siblings and how they want to proceed.  Id sit down with them all and have a frank discussion.  I would then have a formal document drawn up to come into foce on the day you or your partner whoever shall pass away second.  This could be attached to the will and a codicil added to show the executors etc what you all have agreed to.  It would also mean any fighting that may occur after your passing is alleviated before it starts.  

Also discussion need to be had as to how the son will pay his siblings there shares in the outcome of him losing his job for whatever reason, or any other situation which puts a strain on his finances.  I am sure you wouldnt want your son not eating because his siblings have demanded their monthly money and that was all he had to his name.

I know these discussions are not easy but sometimes they are the best things to have

Rob

relaxtwotribes

Your son’s inheritance will only reduce the term of his loan if the loan document stipulates that any prepayments are to be applied in inverse order of maturity.  Otherwise, your son is able to claim that his inheritance is applied against the immediately following repayments due and that would mean nothing going to the two sisters until his actual repayments are due to start again.

Emmia

What happens if your son dies without repaying the loan either to you, or his siblings?

£400k is a lot of money, was it to buy a property? If so, could he raise a mortgage on that property either to reimburse you more quickly, or to pay his siblings off if they wanted the money?

boingy

It's a difficult one for sure and it might be folly to assume the kids are all going to continue getting along indefinitely. Once both parents have gone a family can suddenly lack the glue that held them together and kept the peace, and long suppressed feelings and resentments can start to bite. I've witnessed this first hand with my wife's siblings. They used to get on really well but now they fight about everything and are always trying to get my better half to take their side. We're coming up to 2 years since their dad died and very little progress on the will and probate. They even managed to argue enough for the solicitor to quit!

So I agree that the son should be taking out a loan or a mortgage to settle the informal debt sooner rather than later. It's not very fair on his sisters to do anything else.

doodling

Hi,

What are the terms of the loan, it sounds like they are somewhat unclear?  You can't usefully put anything in your will that violates those terms.  Also note that your executors (and maybe their executors as well!) are stuck with a long job unless there are explicit terms relating to your death (e.g. do the terms of the loan permit ownership of the debt to be passed to the beneficiaries, or will it be stuck with the executors?).  If interest is being charged then life is even more complex as your executor will be doing tax returns (and paying tax) until the loan is paid off.

It sounds like the plan is to renegotiate the terms of the loan, note that the borrower doesn't need to agree to any changes.

I would be having a discussion with a solicitor to understand what the current loan terms are (to the extent that they are known), what that means in the event of your death and how the terms of the loan might be renegotiated so as to make it clear what happens in that event.

The best outcome would be that the value of the loan is reduced to less than 1/3 of the value of your estate by the time you die (e.g. by the borrower finding alternative finance), thereby avoiding your other beneficiaries from living with a somewhat frustrating financial arrangement.  I would speculate that any other option will eventually cause a rift between your children unless they happen to be exceptionally chilled people - most beneficiaries are not going to consider one person getting their inheritance several years before the death whilst the others get it 20+ years after (largely at the whim of the person who got their inheritance early) as fair.