Although not always a good idea, it is not uncommon for family members to loan each other money, or for other circumstances to arise in which one family member owes money to another. When the person to whom the debt is owed dies, that debt becomes an asset of the estate, and generally still must be paid.
New Hampshire law allows an estate to deduct from an inheritance the debt owed to the estate, known as a setoff. RSA 515:7 states “if there are mutual debts or demands between the plaintiff and defendant at the time of the commencement of the plaintiff’s action, one debt or demand may be set off against the other.”
This statutory right to a setoff applies to decedent’s estates, and will be applied against an inheritance for debts that existed at the time of the decedent’s death.
If there is an agreement for future payments, such as under a promissory note, setoff under RSA 515:7 is not available for those future payments not yet due. The requirement of mutuality means the debt must be due to and from the same people in the same capacity.
For example, if a parent makes Child A the trustee of a trust, and Child A fails to make mandatory distributions to Child B, and Child B later dies and Child A is a beneficiary of their sibling’s estate, the inheritance due to Child A from Child B’s estate may not be reduced by the amount Child A owed to Child B as a trustee of the parent’s trust.
One should review carefully the debt owed at the time of death, who it was owed from, and in what capacity, if considering a right to a setoff against an inheritance.
