Legal Tip 40: Forgiving Loans on death - A recent case

Discussion in 'Legal Issues' started by Terry_w, 28th Jul, 2015.

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  1. Terry_w

    Terry_w Structuring Lawyer and Finance Broker - all states Business Member

    18th Jun, 2015
    Forgiving Loans on death: A recent case

    I have previously written on the importance of evidencing transfers of property, including cash, so that there can be no dispute about whether the transfer was a gift or a loan. Even with family members disputes often arise in 3 situations

    1. Bankruptcy of one party

    2. Disputes/relationship breakdowns

    3. Death of one party

    If the transaction is a loan then you need to consider death. Death of the borrower and death of the lender. Consider whether the loan will be forgiven at some point, include on death of the lender. If it is to be forgiven then document it - ideally in the will and in the written loan agreement.

    There is a recent case, Steiner v Strang [2015] NSWCA 203 (read it here!sy=400596), where a mother transferred $881,000 to her adult son and the son used the money to purchase a residential unit. The mother later died and the executors of her estate sued the son to recover the money. The son argued it was a gift and the executors argued it was a loan.

    It was actually documented as a loan, but the argument was over whether the loan was to be forgiven upon the death of the mother. The loan documentation contained no signatures and no evidence the mother ever seen it. There was a later document which was an acknowledgment of loan and was signed by both parties. But this document did not mention anything about the loan being forgiven.

    The mother later made a will and made specific mention of the acknowledgement of loan agreement, but no comments about the debt being forgiven.

    The matter ended up in the NSW Supreme Court and then the NSW Supreme Court of Appeal. It is still going through the courts. The costs must be huge.

    Tip - make sure you record things in full and Seek legal advice!
    Perp likes this.