loan by beneficiary

[MrBarclay]

Hello folks. My wife and myself are considering making a loan to my elderly mother for her living costs. I am an executor and a 50% beneficiary in her Will. I am of course grateful to be a beneficiary, and we have already made mum a small loan, with a 4% interest rate. The “open amount” loan agreement has been signed between us and left with mum’s solicitor alongside the will. Our signatures have been witnessed.
However, as I crunched the Numbers on the estate, I realise that as I am a 50% beneficiary, our net return from the estate may only be some 50% of the loan.
Here are some (hypothetical) rough example numbers:
Loan of 100 at interest rate of 4% for 3 years: 112 owed
Net estate 500. Estate net of loan repayment = 500 – 112, = 388
50% share = 388 divided by 2 = I94.
So if we had not made a loan, our return would be 500 ÷ 2 = 250.
With the loan, our return would be 194. The net effect means that roughly only 50% of any loan would be repaid.

The alternatives would be:
To change the wording on the will or loan agreement
For mum’s estate to take out a loan against her house, but the costs and interest rates are likely to be higher
Equity release of house for the estate

Any comments would be helpful. Many thanks

[Dod101]

The first thing to say is that if the estate takes on a loan then naturally that is going to reduce the net value of the estate. It could not be otherwise. Both beneficiaries lose out. To the extent that you are getting interest on your loan and there are sufficient assets to cover the loan as and when it has to be repaid, presumably on her death you are losing nothing.

Then you introduce her house. Just changing the loan provider will not magically change the effect on her estate. It might even reduce it if the interest rate is higher from another provider.

Hopefuyllly you have checked on entitlement to state benefits of all sorts, pension credits, housing benefit and so on.

I am afraid that many children would simply take the cost of supporting an aging mother on the chin and that would be an end to it. If your mother has to go in to a care home that will rapidly reduce the value of the estate and there is not much you can do about.

Dod

[carrie80]

I think you're forgetting the expenditure that the loan is being made for and the cost of accessing the capital in a different way.

Assuming that the 100k expenditure is going to happen regardless, but there is a no interest way of accessing the funds directly from the estate (say from a savings account), then post expenditure the net estate value is 400k and you get 200k each.

If you make the loan and the 12k interest becomes due, then the net estate is 388k, the other beneficiary would get 194k and you would get 206k (including the interest). There is a 12k difference between what the beneficiaries recieve (ie the full interest), but the estate is reduced by the interest cost, so each beneficiary gets 6k less excluding the interest.

If the 100k expenditure is instead funded by a bank loan at the same rate, then both beneficiaries get 194k and the bank gets the 12k interest. Therefore, you are only "losing out" if there's a lower cost way to release the funds.