What should I do if I’m lending a significant amount of money to a friend?

Has a friend or family member requested you for a loan?

 Most of us are more than happy to help out family or friends during an emergency. However, the informal nature of these arrangements makes payment recovery more difficult and often leads to family rifts. Sadly, when the time comes for repayment, borrowers often forget about their obligations.

 On the other hand, needing a loan does not necessarily make the borrower an unreliable person who is incapable of repaying the money.

 Rather than having an acrimonious row at the dinner table, follow these important ground rules to protect your money and your personal relationships:

 

Do’s and Don’ts of Lending Money to Friends

•  Keep the arrangement formal

 Remember to include the amount, the date of repayment, terms of repayment (lump sum payment or instalments), mode of repayment (cheques, bank transfer) and any interest rates to be charged. Both parties should sign the agreement.

• Put everything in writing

 A detailed written account of the transaction will lend credibility to your case in the event of non-payment. Keep a record of the transfer (online payment, cheque number and copy etc) and any ongoing communication.

•  Review your Will

If one child has borrowed money, it may affect their (or other children’s) share of your estate and assets in the event of your death. A reliable lawyer can help update the terms of your Will and adjust your estate to reflect the transaction. This will help you enjoy better peace of mind and prevent future problems from cropping up.

 

Why Does It Matter?

Having a proper record of the transaction is very important for several reasons. One or more of the following events may occur after you’ve loaned the money to a child or grandchild:

•  The child may get divorced from a spouse or separated from the partner; the spouse/partner may seek a share in the ‘gift’.
• The child or grandchild may die, and the widow or widower will receive the inheritance.
• If the child goes bankrupt, or the business fails, the bank or creditor has a right to lay claim over the money if it is not recorded as a loan.
• Other children may be unhappy with the effect on the Will or the terms of estate distribution.

 

How Lending Money Affects Estate Planning

When there is an outstanding sum of money to be collected, the Will executor is legally obliged to collect the sum, even if the borrower is a family member or a child. In legal terms, this process is called ‘fiduciary care’.

You may want to adjust the loaned amount against the borrower’s share of the estate, or you may want to forgive the loan (legally known as ‘forgiven by Will’). Either way, it’s a good idea to update the terms of your Will and plan your estate according to your preferences.

In the absence of documentation, the amount is considered a gift in the eyes of the law. To avoid problems, discuss the advance or loan with your spouse or partner first and put everything down in writing.

Please feel free to contact Owen Hodge Lawyers on 1800 770 780 for guidance regrading lending money to family or friends. Our experienced legal team can help you document the transaction, update your Will and plan your estate.