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Will My Sister's Loan From Dad Be Deducted From Her Inheritance?

Family Loans Come With A Price

When a child borrows money from a parent, especially a large amount, it is not uncommon for the other siblings to be jealous or at least curious about the family loan. However, if the loan goes unpaid before the death of the parent, this can certainly change the how the siblings feel about the money.

Sister Angie Has A Loan With Dad

Angie always had financial difficulties and had asked Dad to help bail her out. For a while, she ran up credit card bills and six years ago Dad gave her $20,000 to clear up her debts.

Later, Angie married "Mr. Wrong." After a year she got a divorce and Dad gave her another $40,000 to get a new house and restart her life.

The four other brothers and sisters were not happy that Angie used Dad like an ATM for her financial needs. However, Dad obviously wanted to help her so the other children didn't say anything to Dad.

Dad Passes Away

Two months ago Dad died. Angie showed up after the funeral and began asking to get more money because she wanted to buy a new car.

That started a huge argument among the siblings.

Among other things one brother said the $60,000 she had gotten from Dad should be deducted from her share of the inheritance. Sister Marjorie who was appointed personal representative of Dad's estate was unsure how to proceed.

Minnesota Probate Law

Under probate law in Minnesota, it is possible for the personal representative to exercise the "Right of Retainer." What this means is that if the money Angie got was a loan or an advance payment of her inheritance, the amount could be deducted from the share Angie would get in the probate proceeding.

It is always best if Dad had wanted the money to be considered a loan or advancement that he should have gotten a promissory note from Angie or that Dad would change his Will to mention that any amount that had not been repaid during his lifetime would reduce her inheritance.

That, however, is perhaps what perfect families do in a perfect world.

An Unspoken Understanding For The Loan

It is more common that Dad or Angie or the rest of the family has an "unspoken understanding" that it was a loan and Angie should pay it back to Dad or to Dad's Estate after he dies.

However, family members can have a different perception of it after Dad's death.

The issue of whether Dad intended it as a loan or a gift can be decided in litigation before the probate court when it comes time to distribute the assets of the estate.

If Angie claims the $60,000 was a gift, under Minnesota law, she would have to prove by "clear and convincing" evidence that Dad intended to give it to her with no strings attached. A better way is for the family to get clarification of how the $60,000 should be treated at the time the money is paid or by Dad spelling it out in his estate plan.

Whether it comes down to spelling it out in Dad's estate plans or sorting it out in probate litigation, the family will need a probate and estate planning attorney.

The Need For An Estate Plan

It probably will not surprise anyone that it is much less expensive for the family to spell it out in the estate plan rather than through litigation about what was the intention of the decedent.

The contents of this video are for information only and are not to be interpreted as legal advice. For personal legal advice you should consult with an attorney who is experienced in probate law or estate planning. The U.S. Treasury Department requires us to advise you that any written tax advice cannot be used and is not intended to be used by any taxpayer for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code. Written advice from our firm relating to any Federal Tax matters may not, without our express written consent, be used in promoting, marketing or recommending any entity, investment plan or arrangement to any taxpayer. 

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