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How Do You Keep Things Equal When Kids Owe the Parents Money?

Can Their Problem Be Solved?

The Problem

Submitted by email from M.C.: 

We farm 1,100 acres with one son; our two daughters and another son don’t farm. We’ve helped our off-farm son financially a few times, totaling $65,000. We’ve given $35,000 to a daughter. We doubt they’ll pay it back. The other daughter makes subtle comments, and our farming son is upset because it could have gone toward the operation. How can our estate even this out among the kids if the money isn’t paid back?

The Solution 

I Iove to coach my son’s basketball team. At his age, they don’t officially keep score. However, the boys on the team sure do! They count every bucket to know who’s ahead. I’ve seen families do the same thing when it comes to estate distributions. 

Parents often help the kids out financially when there’s a divorce, health concerns, business struggles, or poor life choices. I’ve seen some parents pull out a spiral notebook detailing every gift, loan, or paid expense ever given. It’s like we keep score just to make sure everyone wins by the end of the game. This can cause unnecessary tension. 

When you gave the money, did you lay out clear expectations? Was it a gift? Or was it a loan? Saying “pay it back when you can” sounds nice, but does that mean if they can’t, then they never have to? If you think it will go unpaid, maybe it’s best to just call it a gift and move on. Is it worth the financial and relational capital required to get back to even? That said, some families reconcile the imbalances by accounting for it through the estate. 

Here are four options. 

1. Family ledger. This is the notebook mentioned earlier. Understand, you’re relying on a family settlement here, not the executor’s actions, unless it’s referenced in your will. Prepare for challenges. Are the books accurate? Has interest accrued? What if it’s lost? Siblings might keep their own score book. “Mom and Dad gave you cheap rent.” “They also provided you free childcare!” “Yes, but who was here to take care of the folks?” Each player throws points on the board, but no one wins. The family ledger requires an agreeable family, clear communication, and documentation.

2.  Estate distributions. You could reconcile the imbalance through your will by adjusting the inheritance value among the kids accordingly. For the math to work, first distribute an amount equal to gift/unpaid loan to the other kids. Then split the remaining estate equally among all four. Make sure there is enough cash in the residual estate to cover this. 

3. Coordinated beneficiaries. You could offset the imbalance through your life insurance beneficiary designations, rather than your will. The math gets a little tricky, but the advantage here is that you don’t have to update your estate documents if the loan amount changes. You simply update your beneficiary percentages. Also, wills could get challenged. Life insurance payouts are based on a signed contract, not your will.

4. Promissory note. This is probably the best option if you expect the money to be repaid. The signed note identifies the loan value, interest rate, amortization period, and any penalties if the loan is not repaid. Unpaid balances are still due to the estate upon death. You can use an applicable federal rate for lower interest, allow refinancing, and stretch the amortization to make it cash-flow. 

You can go crazy keeping score. Simply make opportunities equal. Define what’s a gift vs. what is a loan. Set clear expectations on outstanding balances and adjust your game plan accordingly.

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