Lending money to mother-in-law: loan or gift?

My husband helped my mother by giving her $1,500.00 per month for the last 9 years. We had a binding contract that my mother would pay the full amount back with 3% interest. We were not aware that my mother was not paying off her mortgage, accumulated some credit card debt and now has a mortgage of $100,00.00. My question is what type of documentation do we need to assure that we will be paid the full amount before creditors are paid upon my mother passing? My mother’s home is worth approximately $230,000.00.

Terry Says: What were you thinking?  How did you think your mother would be able to pay you back?  No matter what your claim, the mortgage lender will come first, as they have a “first lien” on the property.  (I don’t know how she was able to surprise you with a new loan on the property if she doesn’t have enough income to live on — unless she defrauded the bank and claimed your monthly check as income!)   Did she say she would repay you from her estate when she dies?  If so, you might have a long time to wait!  And you’d better be sure that you are beneficiaries under her will.

Or else have her re-title the home in joint name with your husband to establish his claim to any equity left over after the mortgage is paid off (again, assuming that the lender would allow this, which is unlikely).  Or, the home could be retitled into a revocable living trust, with your husband as successor trustee.   The bank wouldn’t object to that because it is an estate planning tool, and wouldn’t impose on their lien — although they would have to agree.  At least, doing that  that would allow your husband to distribute the assets after the mortgage balance is repaid — and might be helpful in getting your money back.

I would suggest that you contact the lawyer who drew up this “binding contract” and  check the terms.  If she didn’t promise to pay until her death, then there’s nothing you can do now about the amount you’ve already given her.   And you couldn’t write it off as a bad debt, because she wouldn’t be in default until she dies and then only if her estate fails to repay you.  But you might want to file a lien against the home, if the contract allows, so that if she sells and moves out you can claim payment.  And you should be sure the property taxes are being paid. (That’s why banks collect a reserve for property taxes!)

I’m “practicing” law here — without a license!  So I suggest you contact the lawyer who drew up this contract — or find a lawyer (more money spent) and get this clarified NOW, while there is still some equity left in her home.  You can’t force her to sell — but maybe that would be the best course for her.  She could repay the bank, repay you — and have some savings.  Then she could move into a senior living place that would be more affordable.

EVERYONE ELSE PAY ATTENTION:  Do not “lend” relatives money without recognizing the fact that you don’t want to sue them for repayment, so the “loan” is likely to become a “gift”!