Estate Planning Newsletter – March 2017

WAS IT A LOAN OR WAS IT A GIFT?

In the case of the Estate of Lana Hopson Reed, the Tennessee Court of Appeals dealt with the issue of whether money that was transferred by parents to a daughter was a loan or a gift.  After the daughter died, an intestate estate was opened, and the only claim against the estate was by the parents claiming a debt of $28,000.00.  The claim was based on the parents’ position that a loan was incurred by the daughter from the parents to pay off her mortgage on her home to prevent a foreclosure.

The proof in the case was that the father testified that he made a loan in the form of a wire transfer to the Bank of America to pay off a pending mortgage.  Although no promissory note or written document was signed by the daughter, the father testified, in the presence of a Bank of America employee, that he told his daughter that the transfer was a loan.  The Bank of America employee testified she overheard a discussion between the father and the daughter where the father stated that the wire transfer was a loan.  The Executor testified that the daughter was on a total income of $1,000.00 per month and she could not have been expected to pay back the transfer of $28,000.00.  Therefore, the Executor argued that the transaction was likely contemplated as a gift.

The Estate objected to the claim on the basis that it was not in compliance with the Statute of Frauds.  The Statute of Frauds provides that certain transactions must be evidenced by writing to be enforceable.  The Court of Appeals wrote that the question of whether a particular agreement is included within the Statute of Frauds depends on the terms of the agreement itself and the intentions of the parties at the precise moment the contract is made.  The Court of Appeals discussed and analyzed various sections of the Statute of Frauds that are too detailed for this newsletter.  The Court of Appeals found that the Statute of Frauds did not apply, and that the loan did not have to be in writing to be enforceable.

The Court then turned to the remaining question of whether the $28,000.00 transfer was contemplated by the parties as a gift or a loan.  The Court of Appeals relied upon the Trial Court’s commentary that the Bank of America employee’s testimony was very convincing. The Court of Appeals wrote that in order to sustain an inter vivos gift, the evidence must be clear and convincing.  With the lack of clear and convincing evidence that the transfer was intended to be a gift, the Court found that the $28,000.00 was intended as a loan and not a gift.

MY RECOMMENDATION:  If a transaction is intended to be a loan, prudent practice would be that the loan be properly evidenced in writing. If the intent is that a transfer of money is intended to be a loan, do not rely on the Courts to “bail you out” on an undocumented transaction.  One slight variation of the facts in the Reed case, and the Court could have found that the transfer was intended to be a gift.  There was no evidence in the Reed case about whether the daughter ever made any payments on the loan.  Additionally, there was no evidence as to whether the parents ever sought repayment of the loan during the period of 1-1/2 years after the loan was made until their daughter died.

Yours very truly,

RAINEY, KIZER, REVIERE & BELL, P.L.C.

William C. Bell, Jr., Attorney at Law