If you’ve loaned money to a child, a family trust, or to entities within your personal investment or business structure, you might assume those debts will be honoured, or at least recognised, when you pass away. However, unless steps are taken to formally record and maintain those loan arrangements, your executor may discover too late that the loans are no longer legally enforceable.
This article explains how the six-year limitation period can extinguish your legal right to recover unpaid loans, how this can disrupt your estate planning intentions, and what steps you can take now to prevent future conflict and uncertainty.
The law: a 6-year window to enforce a loan
Every Australian state and territory has legislation that limits the time in which a creditor can take legal action to recover a debt. In most cases, this period is six years from the date the debt became due and payable. If no repayment is made and no written acknowledgment of the debt is provided by the borrower during that time, the debt becomes statute-barred, that is, legally unenforceable.
This applies not only to formal loan agreements, but also to informal family loans, unpaid present entitlements (UPEs)**, and related-party loans within trusts and company structures. Once the loan expires under the limitation period, your executor cannot compel repayment, even if the debt still appears in your financial records.
**Even though a UPE is not a loan (post-Bendel), it is still an equitable chose in action – a legal right to receive payment – and can be extinguished if not acknowledged or acted upon within a statutory period.
Why this matters in estate planning
Estate planning often involves balancing fairness, financial security, and family expectations. If you’ve loaned money to one child and not another or moved money between entities intending it to be repaid, those amounts may need to be taken into account to achieve an equitable outcome.
But the law treats expired loans as unenforceable, which means your executor may:
- Be unable to recover the funds from the borrower;
- Be unable to enforce tax strategies involving UPEs or Division 7A loans; or
- Be exposed to disputes from other beneficiaries if your intentions can’t be implemented.
When loan arrangements are unclear, undocumented, or outdated, they introduce uncertainty, and uncertainty is the enemy of effective estate planning.
Want to make sure your assets end up where you intend? We can help, call us on 1300 654 590 or email us to speak about your estate planning.
What counts as acknowledgment?
To preserve the enforceability of a loan, the borrower must:
- Make a payment of principal or interest; or
- Provide a signed written acknowledgment of the debt.
The acknowledgment must be made before the six-year limitation period expires. This can be a letter, email, signed statement, or even a formal resolution from a company or trustee. It must be unambiguous about the existence of the debt and the borrower’s recognition of it.
Informal conversations, handwritten notes, or accounting entries, while helpful in establishing context, will generally not be sufficient to reset the statutory clock.
Practical examples: family and entity loans
Example 1: trust to company loan
In 2015, you loaned $120,000 to a company within your group. No repayments have been made, and the company hasn’t acknowledged the loan since 2016. In 2025, your executor attempts to recover the funds to help pay estate debts. But the statute of limitations has passed, and without a signed acknowledgment or part payment, the debt is no longer enforceable against the company.
Example 2: loan from parent to family trust
You personally lent $300,000 to your family trust in 2014 to help it buy a property. You always intended the trust to repay the funds, but there was no formal loan agreement and no repayments or correspondence since 2017. In the absence of acknowledgment, the executor of your estate cannot enforce the debt. This could result in a windfall to one group of beneficiaries to the detriment of others who expected the loan to return to your estate.
Example 3: Unpaid Present Entitlement (UPE)
Your trust resolved to distribute income to you in 2016, but the funds were retained by the trustee. No formal loan agreement was entered into, and no part payments or acknowledgments have occurred since. In this case, your entitlement may now be statute-barred, and your executor could have no legal right to recover the amount from the trust. This may limit the ability to enforce, offset, or forgive the entitlement through your estate plan.
How to future-proof your estate plan
Addressing forgotten or stale loans is essential to preserving the integrity of your estate plan. Consider taking the following practical steps:
- Document Loans Clearly: Avoid relying on memory or informal agreements. Use formal loan documents that set out terms, repayment obligations, and interest.
- Refresh Aged Loans: Ask the borrower to sign a simple acknowledgment or make a small repayment.
- Review Inter-Entity Accounts: Especially where trusts, companies and partnerships are involved.
- Update Your Will: Be explicit about whether loans are to be forgiven, offset, or enforced.
- Don’t Assume Time Stops When You Die: Executors can only enforce what you could have enforced while alive.
A word about forgiveness in Wills
It is common for Wills to forgive debts owed by children or trusts. However, if the debt is already statute-barred at the date of death, the clause may be legally meaningless. Worse, the existence of a forgiveness clause may imply the testator still viewed the debt as active raising questions about equal treatment among beneficiaries and the intentions behind other provisions of the Will.
Proper estate planning requires you to decide, document, and maintain your position on family loans during your lifetime.
How we can help
We work closely with accountants, financial planners, and families to build robust estate plans that stand up legally and practically.
We can assist you to:
- Review and formalise existing family or inter-entity loans;
- Prepare or update acknowledgment documents;
- Ensure loans are properly reflected in your Will and other legal instruments; and
- Protect your executor from future disputes or unenforceable claims.
Don’t leave your intentions to chance or to the courts. Let’s make sure your legacy is protected. Call us on 1300 654 590 or email us to get started.
The information contained in this post is current at the date of editing – 23 June 2026
