The loan agreement – what happens after death?

When we hear the word loan, we think of a bank loan. But money is also regularly lent within families or between friends. However, not many people think about what happens if the borrower dies. This could prove to be an expensive mistake.

Loan agreement – the basics

A loan agreement is defined as the transfer of a certain sum of money to a borrower (see also: sample contract in our download centre). Interest is only to be paid if it was agreed upon. Theoretically, the parties can verbally enter into a loan agreement, but for reasons of proof, the written form is always recommended.

A loan agreement between a testator and a potential heir differs fundamentally from an inheritance advance: loans must be paid back, whereas an inheritance advance is merely considered part of the inheritance. Another difference is the tax burden. As long as the loan is outstanding, the economic value lies with the lender. As a result, the lender must pay tax on the value of the loan. If the debt is waived for the borrower, then the assets change hands and the recipient must pay the taxes from that point on.

The granted loan agreement

Loans are essentially claims. These pass to the heirs upon the testator’s death. One problem, however, is often that the heirs do not know about the claims. This is yet another reason why written documents are advantageous – they serve as a reminder and provide information. If the contracts are neatly filed or deposited, the heirs will learn about the loans and the value of the claim will be included in the estate. So if you are a loan creditor, it is best to make arrangements today so that your heirs are aware of such contractual agreements.

Example loan

A deceased person leaves a car (value: CHF 20,000), a debt of CHF 10,000 and CHF 45,000 in cash (total: CHF 75,000). The loan works like any other asset and passes as such to the heirs. With three children, C1 receives the car and CHF 5,000, C2 receives the claim and CHF 15,000 and C3 receives cash values of CHF 25,000. Of course, they may be distributed in other ways.

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