What happens to a personal loan from my mother to sister if it's not paid back before Mom's death?

Larryslade asked...

My mother is in a nursing home on Medicaid. My sister was given a loan of $5000 from my mother about a year ago. She is being allowed to pay it back $100 a month. This obviously will take awhile. My mother is 93 years old. What happens to that loan if my mother should pass away before it's fully paid? I live in Massachusetts. Thank you

Expert Answer

Barbara Repa, a Caring.com senior editor, is an attorney, a journalist specializing in aging issues, and the author of Your Rights in the Workplace (Nolo), now in its 10th edition.

No matter where a person lives, debts and obligations die with them. Their estate becomes the payor and collector.

For example, if a person dies owing money, the estate must generally pay it off"”often with funds from a bank or savings account, but sometimes by selling property such as a house or car. And a person who owes a debt to the one who dies is generally responsible for paying the balance to the estate.

But in reality, what happens with loans between family members such as the one you describe turns on whether there were formal or written arrangements for the loan"”and on whether there are any estate planning documents, such as a will, dictating what should happen to the balance owed.

Here's how that may translate: If your sister and mother had a formal written agreement spelling out the terms of the loan, your sister could be made to pay the balance to an account or the beneficiaries designated to receive it. The written agreement would be enforceable as a contract.

But as is often the case in family arrangements, there is no formality and no written agreement"”and at death, it is difficult to prove that there is money still due and owing. If this is the case with your sister, the strongest pull for her to pay off the balance might be a sense of honor or obligation. Without that, the other survivors would realistically be hard-pressed to make her pay.

Another common scenario is that the person owed the money agrees to "forgive" the debt at death, often in a provision in a will"”and this is especially common in a loan to a family member. So it is possible that your mother made a document with a similar forgiveness direction in it.

If you're concerned that your sister may renege on the loan"”and that would be contrary to your mother's wishes"”you might consider asking your sister to sign an agreement signifying her intention and obligation to pay off the debt. You'd want to weigh this option, of course, against the real possibility that it would offend or anger her"”as technically, the matter is between her and your mother.

Another possibility if you are concerned about repayment would be for your sister to reduce her share of any property she might be entitled to take at your mother's death"”although the high costs of nursing home care and the fact she is receiving Medicaid likely mean there will not be substantial property for potential beneficiaries to take.