If you pass away, a private loan you made doesn't go away. The borrower still owes the money. Who gets paid depends on how you hold the loan.
It's not a fun thing to think about. But it's one of the kindest things you can plan for your family.
It depends on how the loan is held
- In your own name: the loan becomes part of your estate. Your will, or your state's rules if you don't have one, decides who gets it. It may have to go through probate, which can take months.
- Jointly, with right of survivorship: the co-owner, often a spouse, usually takes it over directly.
- In a trust: your successor trustee steps in and follows the trust's instructions, usually without probate.
- In an IRA: the loan stays in the IRA, and the beneficiary you named on the account takes it over.
If the loan is in an IRA
Your IRA beneficiary form decides who gets it, not your will. Keep that form up to date. Most beneficiaries who aren't your spouse have to empty an inherited IRA within 10 years. If the loan runs longer than that, they'll need a plan.
Free lender guide: 5 questions to ask before you lend to anyone, plus a 12-item document checklist.
Make it easy on your family
- Keep a simple file: who you lent to, how much, the documents, and who to call.
- Tell someone where that file is.
- Check your beneficiary forms on every IRA.
- Ask about a trust. An estate planning attorney can tell you if one makes sense.
Questions to ask the borrower
- If I pass away, who do you pay, and how do they reach you?
- Can my heirs keep the loan going, or will you pay it off?
- Will you send my family the payment history and loan balance?
Anyone you lend to should have clear answers. Here's how private lenders get their money back.
Common questions
Does a private loan get canceled when the lender dies?
No. The borrower still owes the money to the lender's estate, co-owner, trust, or IRA beneficiary, depending on how the loan was held.
Does a loan in my IRA go through probate?
Usually not. It passes to the beneficiary named on the IRA account. Keep that beneficiary form current.
Can I put a private loan in a trust?
Yes. Many lenders hold loans in a living trust so a successor trustee can step in without probate. Talk with an estate planning attorney.
Written by Larry Hoffman
Managing Member of LJH Investments, LLC in Madison, Indiana. In real estate since 2006, with 300+ mortgage notes bought. Author of Mailbox Money Retirement.
General education, not legal, tax, or estate planning advice. Rules vary by state. Talk with an estate planning attorney about your situation. All investing has risk, including loss of principal.