Q: My husband and I have three children and would like to help them out with their mortgage, loaning them $50,000 each with a one per cent interest rate. We would have to cash in our TFSAs, a value of $120,000 while the other $30,000 would come from cash on hand. We are 82 and 85 years old respectively and have an employer pension, CPP and OAS coming in every month. Our equity portfolio is $460,000 and we own our own home with no other debt. What is the best way to proceed with these loans? How would we word our wills to cover this?
A: Evelyn, you ask about your wills and personal loans to family members. I knew one case where this worked. The father kept yearly ledgers on his laptop to report his taxable loan interest. He recorded and reported all loan payments. The father shared this information with all of his children. No one complained when his will was read.
Even with proper documentation, though, personal loans may cause family friction. When you refer to these loans in wills, there is added complexity. You can use hotchpot clauses in your will (see below). Executors use outstanding loans to calculate the borrower’s share of your estate.
Hotchpot clauses require your assets, stock, for example, to be put into one pot before division. This is done instead of dividing your stocks or real estate separately. Executors then calculate each person’s share of the pot after deducting their loans.
Deducting family loans can make hotchpot clauses hot potatoes. Beneficiaries can claim loans were forgiven or extra payments were made. Oral variations usually cannot vary from written contracts, but family members often make exceptions. What if one child became ill, lost their job or lost their spouse?
My questions about the loan documents are:
- Will you prepare binding loan agreements that children sign?
- Are children’s spouses to co-sign the loans?
- Will you revise both of your wills to include a hotchpot provision?
I assume this is your first marriage and all three children are yours and your spouse’s. Are you in a blended family? There are more issues to consider. That is a simple answer from an estate perspective. But the other key questions is, can you afford to make these gifts?
I cannot comment on your financial situation. There is a difference between your future financial needs and wants. Consult your financial advisor about your personal needs before making loans or gifts. Will you, for example, have access to funds if you or your spouse move into assisted living? These are key questions to answer with your financial advisor before considering making any loans to family members or friends.
Ed Olkovich is a Toronto lawyer and certified specialist in Estate and Trusts Law
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