Loan Agreement Between Spouses

Clients often think that all “loans” are treated the same in the event of divorce. We know that is not the case. Can you explain the difference between “hard” and “flexible” loans for our readers? John and Mary have set up a $100,000 to 1 per cent matrimonial loan. Mary bought $100,000 from John`s investment portfolio and paid John 1% interest each year. (Note: there are tax consequences related to the transfer of investments that have been valued and are not mentioned in this article). In the second year of the loan, Mary died. Although John, as a sole beneficiary, has received all of Mary`s assets, he must be careful as to how the loan is paid by the estate. He cannot simply accept all assets as an inheritance. Mary`s loan must be treated like any other current loan, which means that an in-kind transfer of estate assets must be made to John in order to withdraw the loan before the remaining assets of the estate are distributed. Assuming that the returns on the investments made with the loan will be higher than the prescribed rate, the revenues were effectively distributed and the overall tax burden of the couple was reduced. Whether you use cash or non-registered assets to finance the loan, it depends: if you have large deferred capital gains, this may be a reason to reconsider the use of these assets. But long-term tax savings on future income, taxable for your wife, may be worth making some of the tax payable today. We have been discussing this possibility with financial advisors for some time, as interest rates have been 1% since April 2009.

While the strategy is very useful from a financial planning perspective, consultants and their clients are concerned about the impact of this strategy if one of the parties to the agreement is at the end of the contract or if clients experience a breakdown in their relationship. That`s why we`ll process these scenarios below so that you`re prepared if you decide to make matrimonial loans for your clients during this quarter. If you have debt, including a mortgage, you need to consider your risk tolerance, investment fees, mortgage interest and short-term cash flow, which can do everything possible to ensure that debt repayment is a good alternative to a marital credit strategy. I don`t want to speculate, but given your relatively young age, I can`t help but ask for alternative options for non-registered investments.