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Even with official documentation, personal loans can cause family friction
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?
—Evelyn
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:
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