ARTICLES

Let’s face it, at some point in your life your children are going to come looking for money. Many parents find themselves frequently becoming their children’s willing (or unwilling) creditors. From simple promissory notes, payable on demand, to more complex instruments such as mortgages, there are several options available as a means of evidencing and securing the debt. Knowing that your children will not likely have much money in their early adulthood, you may find that a significant amount of time passes before you even think of attempting to collect on the debt. Be Careful. If you wait too long, you may find that your right to collect on the loan is statute barred, and the debt extinguished.

The Limitation Act creates limitation period traps that are easy to fall into and just as easy to avoid if the proper planning is undertaken. Generally speaking, the limitation period for commencing an action on a debt is 6 years. Once the limitation period has expired, the debt is no longer enforceable and you may be stuck with having provided your children with a very generous gift. The important question then becomes “when does the limitation period begin to run?”

Generally, a debt becomes payable at the time stipulated in the contract. For example, a promissory note may say that the debt must be repaid on a monthly basis or in one lump sum payment 2 years from the date the loan was granted. Where a date for repayment is specified, and the promissory note states that the entire debt becomes payable if the date for repayment is missed, the limitation period will start to run on the date of the missed payment.

In other cases, the promissory note may say that the debt is payable “ON DEMAND”. For ‘demand promissory notes’ the courts have adopted the view the limitation period begins on the date the note is made and the funds are advanced. As a result, if parents lend money to their children under a demand note and do not demand payment or receive any payment within 6 years following the granting of the loan, the parents will likely be barred from collecting on the debt.

Careful drafting and thoughtful estate planning can help parents and lenders in general, to avoid these traps and ensure their loans don’t result in into unintended gifts to their children, friends, or business partners, etc… If you have any questions about your estate planning or the legal consequences of any forms of financing you are considering, please do not hesitate to contact me at 250-980-3362 or by email at deanna@montgomerymiles.com

Deanna

Photo courtesy of 401K 2012