Forgotten loans and other liabilities can cause considerable heartache if they are not afforded due consideration in your estate planning. In the absence of appropriate structuring, commercial loans may be ‘called’ by the lender and this could create additional, and unnecessary, duress at an already difficult time for those closest to you.
If the deceased person (who may also be the family’s main income earner) had a commercial loan or acted as a guarantor on a loan, that loan may become subject to review or ‘called’ upon their death.
Consequently, if the loan is called, an asset may need to sold (and quickly) to repay the affected debt. The flow-on affect could include a possible capital gains tax (CGT) liability resulting from the sale of assets unnecessarily in addition to the potential economic loss incurred as a result of realising assets through a ‘fire sale’ situation.
Selling assets, particularly if it involves the family home, may cause additional financial and emotional distress for family members who may be required to meet loan repayments required by the commercial lender.
An Estate Plan would include considering implementing contingencies for repaying commercial loans including appropriate insurances that could be claimed to pay out the debt. Another option to consider is to direct superannuation benefits to the person who is ultimately liable for the debt.
It is important to structure your Will so that any related entity loans are not called as part of the estate (in-specie distribution of these assets). Many family trusts and private companies are capitalised and funded by way of private loans from related individuals. These are assets of the individual and they may need to be called by an Executor of an estate to fulfil the needs of the Will. Again, without proper consideration and planning, an Executor may need to set in motion acts collect assets of the Estate resulting assets being sold unnecessarily and triggering unwanted CGT events
In the first instance it is important that you consider more than just the tangible assets of your estate. Loans and liabilities need to be given proper consideration, so that at the time of your passing there is a clear process in place that strives to diminish any financial distress or hardship for those closest to you.
As your accountant, we are well aware of your financial position and well placed to coordinate with your lenders, insurers and solicitor towards delivering not just a thorough overview of your entire financial position, but a seamless and fully integrated plan with clear direction for implementation of appropriate strategies that will deliver expected outcomes at the time of your passing.
Let us help you confirm that any loans and liabilities are properly handled in your estate planning. Please contact us.