In this episode of Absolute Trust Talk, managing attorney Kirsten Howe tackles a quietly common source of family conflict: parents giving money to their adult children without documenting whether it’s a gift or a loan. Drawing on years of trust administration experience, Kirsten shares a real family story where canceled checks sparked a bitter dispute among siblings after their parents passed, and she walks through the simple documentation steps that could have prevented it. She also addresses a second pitfall most families overlook: when a loan is properly documented up front but the repayment activity isn’t tracked, leaving trustees with no way to know how much, if anything, is still owed.
Time-stamped Show Notes:
0:00 Introduction
0:35 Kirsten kicks off today’s topic: what happens when parents give money to their adult children without documenting it — and why those transfers can become a problem after the parents pass.
1:05 A trend Kirsten has noticed: Bay Area parents helping adult children with home down payments—a generous move that can create complications during trust administration if it’s not well documented.
1:55 Issue #1: Was it a gift or a loan? The first question Kirsten’s firm runs into when reviewing a trust is the financial history.
2:15 A real family story: parents quietly helped one daughter with several checks during a rough patch. After the parents passed, the other siblings dug up the canceled checks and called them loans — and the family fight was on.
4:15 The takeaway: document it. Whether it’s as simple as writing “gift” on the memo line, adding blanket gift language to your trust, or having a signed promissory note for a loan, make your intent clear in writing.
5:30 Issue #2: The loan was documented properly — a real promissory note, signed and everything — but that was years ago, and now nobody knows what’s been paid back.
7:05 The fix: keep good records on both sides. A simple spreadsheet for the lender, canceled checks or equivalent for the borrower — without it, the trustee may have to assume nothing was repaid.
8:00 Why family loans need to be treated like business: the love and trust between parent and child don’t survive the parent’s death, and the next person at the table may see things very differently.
8:45 The bottom line: if money is moving between you and your child, document it like a business deal — so your family doesn’t end up litigating it years later.
Transcript:
Hello and welcome to Absolute Trust Talk. I’m Kirsten Howe, the managing attorney at Absolute Trust Counsel. Welcome.
Today, I’m going to present another episode in my mini-series about Estate Planning Misses. I use the word “misses” to stand for mishaps, misunderstandings, miscommunications, and misexecutions — all the things that can go wrong in an estate plan, lead to trouble, and that I think can be avoided. These are things we’ve seen happen, and the kinds of things we’ve learned over the many years we’ve been doing estate planning, and maybe more importantly, trust administrations — seeing how it all plays out in the end and the things that should have happened, could have happened, but didn’t. My hope is that by sharing these little nuggets with you, you can tighten up your own estate plan, fine-tune it, and make sure everything is really as perfect as it can be.
What I’m going to talk about today has to do with parents giving money to their children. Parents give money to their children all the time, for lots of different reasons. I’ve noticed in the last five or ten years a bit of a trend of parents giving money to their adult children for the very specific purpose of helping them buy a home in the Bay Area. I get it — it’s very hard, if not impossible, to live in the Bay Area and at the same time save money for a down payment to buy a home in the Bay Area. It’s a lot of money, and it will take most people a very long time. Parents want to help out. We want our children to live near us, of course, and that’s one way to do it. But this can, if it’s not done well, lead to problems after the parents die.
That’s the trust administration phase I’m talking about — where we are reading the trust and all the data, figuring out what we’re supposed to do, and helping our trustee client take care of all of it. This gives rise to a couple of issues I’m going to talk about today. The first one is the issue of: is this a gift or a loan? The parent gave the child some money — but what was the intent?
Let me tell you about a particular family I worked with a few years ago. One of the children had had a little bit of financial trouble over the course of a few years, and the parents wanted to help her out. They gave her some money — several checks over a couple of years, maybe. That was fine. It helped her out, and she got back on her feet. Then the parents both died. I think the other siblings knew about these checks at the time, but after the parents died, the siblings dug up the canceled checks and said, “These were loans, and you need to pay this money back to the estate” — which would mean the sister would get a slightly smaller inheritance than the other kids. Her position was, “No, those were gifts. Mom and Dad gave those to me. They didn’t expect me to pay it back.” Well, the canceled checks didn’t say they were gifts. They were just regular checks, and there was no promissory note — a promissory note would be a document signed by the sister saying, “I’m promising to pay you back this money.” There was nothing in writing saying it was a gift. There was nothing in writing saying it was a loan. They took two different sides, and they fought over it. Eventually, they came up with a solution everybody could live with, and they were able to finish the trust administration and go their separate ways. But there was a long period of difficult conversations and difficult interactions, and a whole lot more money was spent on the trust administration than needed to be — just because people see things differently, and you can’t always predict how somebody is going to behave after you pass away.
My tip here, my lesson, is this: if you give money to your child, document it. Make sure there is something in writing that everybody will see after you’re gone that tells us — is it a gift or is it a loan? If it’s a gift, it could be something as simple as writing a line on the memo of the check: “This is a gift.” For those of you who are millennials and younger, you’ve got to figure something else out, because I know you don’t write checks — but that’s important. Make sure it’s really clear. If it’s a gift, write that down somewhere. Or you could say in your trust: any money I’ve given to a child of mine, unless it’s evidenced by a written promissory note signed by that child, is a gift. Then you’re just making a blanket statement that you don’t want any of it considered a loan. If it’s going to be a loan, document it as a loan — there should be a written promissory note signed by the borrower.
That’s the first point: make it clear, in a way your survivors can understand, whether it’s a gift or a loan. My second point — which has come up in our practice a few times — is that maybe it’s given as a loan, and the parents did the right thing. They got a promissory note, the child signed it. But it was years ago — maybe five years ago, ten years ago. Then the parents die, and our trustee client doesn’t know how much, if anything, is still owed on that promissory note. You have a promissory note that says “I’m borrowing $10,000” or “$100,000,” but we don’t know what the payment activity has been. It’s not always easy to dig that up by looking at banking records, because people may have changed banks. You’re hoping a bank is going to share these past records with you, and it’s just not that easy.
It’s very important, if it’s a loan, that you actually keep good records of the repayment. The repayments could just be tracked on a spreadsheet — every month, or however often you’re getting checks to repay the loan, the parents are making an entry. On the flip side, if you’re the one making the payments, you also want to save your evidence. You could save your canceled checks if you’re paying by check, or if you’re not paying by check, you’ve got to figure something else out. But on both sides, there should be documentation showing that the loan has been paid down — because without it, my trustee client is going to assume it hasn’t been paid down, and the inheritance needs to be adjusted accordingly.
In family situations where a little bit of business is happening, this is the ultimate lesson today: you have to treat it like business and document it like a business would. You may love your parent. You may love your child. You’re happy to give them money. You trust each other. You know what the terms of the deal are — you know if it’s a loan or a gift, and you know how often repayment is going to be made. But once the parent dies, all of that loving and understanding goes away, and now you’re dealing with somebody else on the other side of the transaction. You have to be prepared. Treat it like a real deal — a business deal — and document it accordingly.
I hope you learned something from that. I hope this is helpful to you. I want everyone out there to have the cleanest, most efficient, most beautiful estate plans you can possibly have — so that when you pass away, your children know exactly what to do, and they won’t fight. Thank you for joining me, and I look forward to connecting with you next time.
Resources Related to This Episode:
- A Will is Not Enough – Securing Your Legacy with Estate Planning Life can change in an instant. A will is not enough to be prepared. Get free access to our actionable E-book Guidebook #1 and start protecting your legacy today. https://absolutetrustcounsel.com/guidebooks/
- Learn how to comfortably define gray areas and assess your unique needs to build a secure future now effortlessly. Check out Guidebook #2, Estate Planning Beyond the Basics, here > https://absolutetrustcounsel.com/guidebooks/
- Get our free introductory guide to the most used estate planning tool, family trusts, and understand how we plan to help protect your family. Guidebook #3: https://absolutetrustcounsel.com/guidebooks/
- Absolute Trust Counsel would love to offer access to our Incapacity Planning resource page: https://AbsoluteTrustCounsel.com/Incapacity-Planning/. We’ve collected our top planning information all in one place so listeners can find videos, guidebooks, blog posts, and a host of information with tips and strategies on implementing, planning, and protecting themselves and their loved ones.
- We’re pleased to provide a library of e-books to address common estate planning questions and concerns in practical, easy-to-understand language. https://AbsoluteTrustCounsel.com/Resources/.
- ASK KIRSTEN: If you’d like Kirsten to answer your question on the air, please email her at Info@AbsoluteTrustCounsel.com.
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