THE TROUBLE WITH LOANS TO CHILDREN

Loans to children are a frequent source of family conflict — and often instigate lucrative estate litigation projects for lawyers. Here’s why.

Loan vs. Gift

There is a huge legal difference between a loan and a gift, namely that a gift does not have to be repaid. But loans may gradually mutate into gifts. For example, under Oregon law, a suit must be filed within six years to collect a debt. If no suit is filed, collection of the debt is barred by the statute of limitations. Thus, if a parent makes a loan to a child and takes no collection action for six years, the child has no legal obligation to repay and the loan has effectively become a gift. This has several consequences. First, and most important, the executor is probably barred from offsetting the child’s inheritance by the amount of the loan. In other words, the loan is irrelevant when determining the child’s share of the decedent’s estate.
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PROBATE PROCESS IN OREGON AND WASHINGTON

Here is a general overview of the probate process for Oregon.  Washington has some similarities but is substantially abbreviated, as noted below.

Probate requires the appointment of a personal representative (referred to as the executor in certain states).  If the decedent dies testate, the personal representative ultimately appointed is usually the first nominee named in the decedent’s will. If the decedent dies intestate, the personal representative is usually the relative or friend who wins the race to the courthouse and files first.
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ESTATE PLANS FOR FARMERS AND BUSINESS OWNERS

Now that the federal estate tax exemption has increased to $5M per spouse, and is “portable,” death taxes are of less concern to family business owners. (“Portable” means that the unused exemption from the first spouse to die may be used by the surviving spouse, which effectively creates a $10M exemption for married couples.) Although Oregon and Washington still have an estate tax (with exemptions of $1M and $2M per spouse, respectively), the state death tax bill should not force the sale of the business.
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LIVING TRUSTS VS. WILLS

Everyone should have a living trust. Avoid probate at all costs. Avoid horrible death tax bills. Avoid exorbitant executor fees and legal fees. The list goes on and on. While there is a grain of truth in these arguments, you should take a closer look before expending resources on a living trust. Here’s why.
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