Including loans made to family members in your will

When creating an estate plan, many individuals consider how their assets will be distributed among loved ones — property, savings, investments, and personal belongings are all typically accounted for. However, one commonly overlooked but highly significant detail is whether you have loaned money to a relative. Including loans made to family members in your estate planning might seem trivial at first glance, especially if these arrangements were informal. Nevertheless, failing to properly address them can lead to confusion, disputes, and unintentional inequality among heirs.

Considering the personal and financial implications of loans within a family dynamic, proper documentation and clarity in your will are paramount. Transparent planning ensures your wishes are followed and helps preserve family harmony after your passing.

The Nature of Family Loans and Their Complexities

Loans made to family members often fall into a grey area between formal financial arrangements and personal gifts. They are often characterised by verbal agreements, a lack of interest or repayment schedule, and an understanding grounded more in familial trust than contractual obligation. This informality, while rooted in goodwill, can become problematic when it comes time to administer an estate.

For example, suppose a parent lends a significant amount of money to one child to help with a house deposit or business venture, with the expectation that it will be repaid over time. If that loan remains unpaid at the time of the parent’s death, the question then arises: should that amount be deducted from the child’s inheritance? Was it truly a loan, or was it a gift? Was it meant to be forgiven or repaid? The ambiguities here can lead to contentious debates among siblings, potential legal challenges, or feelings of resentment and inequality.

Having a clear written record that explicitly outlines the terms of any intra-family loans is not only helpful — it is essential to ensuring your broader estate plan maintains fairness and clarity.

Documenting the Loan: Creating Clarity and Legal Certainty

The first step toward including a family loan in your estate plan is to distinguish the exchange as a legitimate loan rather than a gift. Documentation is key. A well-recorded loan agreement, even between family members, should ideally include the amount loaned, the date, the expected repayment schedule, whether interest is charged, and any collateral, if applicable. It’s also crucial that the borrower acknowledges this as a loan and agrees to repay it under the specified terms.

Where possible, this should be signed and witnessed, and perhaps even drawn up with the assistance of a solicitor. These formalities help eradicate doubts and provide executors of the will with clear evidence of your intentions.

Whether the loan is being actively repaid or has been left in abeyance due to a change in the family member’s circumstances, regular updates to your estate plan — and potential modifications to the loan agreement — should be made to reflect any such changes. For example, if the borrower ceases repayments temporarily due to unemployment or another hardship, noting this in your records and the reasons for the suspension can help prevent future misinterpretations.

Repayment, Forgiveness, and Adjustment of Inheritance

There are generally three paths that can be taken when dealing with loans to family members in an estate plan: request for continued repayment posthumously, full or partial forgiveness of the loan upon death, or adjusting the debtor’s share of inheritance by the value of the loan. Each option comes with its own implications, both financial and emotional.

Continuing repayment of the loan through the estate may be appropriate if the loan forms a substantial financial asset. In this case, your will should empower your executors to enforce the loan. However, this can sometimes appear harsh or create emotional strain between heirs, particularly if the borrower is in a financially vulnerable situation.

Forgiving the loan upon death can be seen as a final gift, but this too needs to be explicitly documented in your will. Otherwise, the executor may be forced to decide how the debt should be handled — a responsibility that increases both the emotional burden and the risk of familial discord.

More common is the adjustment of the beneficiary’s inheritance by the outstanding loan amount. For instance, if one child was loaned £50,000 and the estate is to be divided equally among three children, the other two might receive their full one-third share, while the child who received the loan would receive their third minus the £50,000. Clear articulation of this intention in your will is essential to avoid claims of unfair treatment.

Gift or Loan? Drawing the Distinction Clearly

In some families, significant sums of money have been transferred under the assumption of future repayment, but without clear documentation, those transactions can easily be construed as gifts. HMRC’s interpretation can also affect how these transactions are viewed, particularly with inheritance tax in mind.

Under UK law, gifts made during one’s lifetime may be subject to Inheritance Tax (IHT) if the donor dies within seven years of making the gift. Conversely, a loan is generally considered an asset and could therefore become part of the estate subject to tax unless it is documented as forgiven. This further underscores the necessity of maintaining accurate loan records, both for the family’s understanding and for tax compliance.

If you intended the funds to be a loan, say so — in writing. Include clauses in your will that categorically state any financial transfers to family members that should not be considered gifts, along with instructions on how these are to be treated in the distribution of your estate.

Balancing Fairness and Family Sentiment

Balancing financial fairness with love and care requires a nuanced approach when estate planning involves loans to family members. A rigid, contractual attitude toward money might run contrary to family ideals of generosity and support. However, fairness among heirs is often a primary concern of those preparing a will.

These conversations, while delicate, are easier to have proactively than to leave unresolved and burden loved ones after your passing. Discussing the terms and implications of loans with all affected family members can pave the way for mutual understanding, reducing the chances of disputes. Transparency now avoids tension later.

For example, if you believe one of your children needed a loan under exceptional circumstances — such as to recover from a medical crisis or to escape an abusive relationship — and you do not wish that loan to impact their inheritance, you may wish to communicate this reasoning to your other children, either in writing or through a letter of wishes included alongside your will.

The Role of Executors in Managing Family Loans

Executors have a legal responsibility to administer the estate per the instructions laid out in the will. If loans to family members are to be repaid or offset against inheritance, the executor must have the legal authority and documentation to take appropriate action.

If the loan is undocumented or vaguely worded in the will, the executor may be left in an impossible position. Should they try to collect repayment from grieving family members? Should they trust verbal reassurances about what the deceased intended? Such uncertainties can delay the probate process, lead to legal challenges, or incur unnecessary costs to the estate.

Providing your executors with a detailed record of any family loans, their repayment history, and your intentions regarding how they affect inheritance allows them to act with clarity and confidence.

Seeking Professional Advice: Solicitors, Financial Planners, and Tax Specialists

Crafting an estate plan that includes direction on family loans is best done with professional input. A solicitor experienced in estate law can help draft wills that clearly reflect your wishes and ensure the legal enforceability of your decisions. Similarly, a financial planner can help incorporate the implications of family loans into overall inheritance structures, considering liquidity, timing, and tax consequences.

If significant money is involved, tax implications are not to be ignored. The inheritance tax landscape, particularly concerning gifts, debts, and exemptions, is complex. Failing to adequately navigate it may inadvertently increase the tax burden on your estate or beneficiaries. A tax specialist can guide you through these nuances, helping you to structure loans, repayments, or forgiveness terms in the most efficient manner.

Each specialist brings a perspective that ensures your estate planning honours both your intent and the legal and fiscal frameworks within which your estate will be administered.

Revisiting and Updating Your Estate Plan Regularly

Your financial and familial circumstances will evolve over time — so should your estate plan. If a family member repays a loan, if new loans are made, or if your attitude toward particular financial arrangements shifts, a review of your will is necessary to reflect those changes. What may have made sense five years ago may now no longer align with your wishes or current relationships.

Documenting these updates and discussing them with your solicitor prevents outdated assumptions from complicating your estate’s administration. Annual reviews can also integrate broader life changes, such as the birth of grandchildren, divorce, or the sale of assets, which all impact estate distribution.

Preserving Relationships Through Clear Planning

Ultimately, estate planning is about legacy — not just the assets you leave behind, but the peace and unity you maintain among your loved ones. Loans to family members, while often initiated out of generosity, can become sources of division if not addressed transparently in your will.

By taking the time to clearly document loans, articulate your intentions, and seek appropriate legal advice, you ensure that your legacy is one of thoughtfulness, fairness, and care. It is a gift to your family — not just in taking responsibility for the distribution of your wealth, but in protecting the bonds that matter most.