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Published at December 2, 2020 by Ana-Maria Sanders
Everyone has to go through losing a loved one in their lifetime, and distributing assets is part of the process. The court-supervised administration of a person's estate following their death is legally defined as probate. After all the creditors have been paid off, the remaining assets are then transferred by court order to the heirs. A will does not avoid the probate process but does assist the court in determining how to distribute the remaining assets.
While mainstream financial institutions like regular banks and credit unions typically don't offer probate advance loans, specialized inheritance lending companies do provide these services. One of the key advantages of opting for an inheritance lending company is the speed of service; you may receive the funds within a mere two to three days, provided all the necessary documentation is in place, and there are no unforeseen probate issues.
To ensure a smooth experience with probate advance loans, selecting the right lender is an important step. Here are some essential factors to consider when choosing a probate advance lender:
Having explored how to choose a probate advance lender, let's now turn our attention to understanding the inheritance funding process.
An executor is an administrator for the estate of a deceased person. They must locate all the creditors of the estate and find all properties belonging to the dead. If needed, they have to sell a portion of the property necessary to pay all taxes and other debts. Afterward, the executors must distribute the remaining property and assets to the heirs.
In most states, the probate process is complicated and very time-consuming. Usually, it takes around one or one and a half years to complete. It sometimes can take even longer. Also, executors may find themselves trying to administer in a state with insufficient cash to repay expenses such as real estate property taxes, home repairs, or upgrades required before selling real property.
Most of the time, many estates are cash poor but real estate rich. This means that there's no cash in the estate that may be used for a preliminary distribution until the end of probate. This process of selling real property can also be time-consuming.
When the heirs are in a hurry to get the money from their inheritance for various reasons, they can apply for an inheritance advance or probate loan.
When an heir's expenses are adding up, and they cannot wait until the end of the probate, applying for a probate advance would be a big help. The first step to applying for an inheritance advance would be to contact inheritance lending companies in person, online, or over the phone. It's best to contact several inheritance advance lenders to determine which company offers the best deal in the area. After finding the right lender, the next step will be gathering all the necessary documents for approval. After filling out the application form and being approved of the loan, the lender and the borrower will sign the fund's contract. After signing the agreement, the inheritance lending company will transfer the funds into the heir's bank account. The lender now takes the position of the heir and must wait for the estate to be settled.
There are two types of probate advances:
When an heir borrows an inheritance advance loan, they should pay back the whole amount borrowed and the interest fees after the estate is settled and receive their inheritance. The lender places a legal lien against the inheritance share, so they run little risk of the loan not being repaid.
Estate-based loans work like personal loans that are guaranteed by collateral. The inheritance serves as collateral, and the heir can get a loan against it. Some estate loans are similar to inheritance advance loans because the borrower can repay the full amount when they receive their inheritance. Estate-based loans can also work like installment loans where the heir can pay back the amount in regular monthly payments. It's important to consider whether you can afford the monthly payments while waiting for the estate to be settled.
It's important to note that inheritance advance loans or estate-based loans will not affect other heirs in the estate.
Most inheritance funding companies are licensed and operate in multiple states. If the heir lives in a different region than the estate, working with an inheritance funding company that operates in many states may accelerate the process.
Also, the heir of the inheritance can have access to the probate loan sooner than the beneficiaries.
Preparing the required documents to apply for a probate loan before visiting the lending company makes the process much smoother. Before deciding whether to approve a loan, lenders usually ask for the following documents:
Anyone who can provide the necessary documents proving that they are scheduled to inherit money (and other assets from a family member or friend) may be eligible to apply for inheritance funding. Regular banks and credit unions don't offer these types of loan products, so qualified individuals have to contact an inheritance lending company. Once the heir receives the required funding, they are free to use it as they see fit.
Applying for an inheritance loan has several advantages. The most prominent advantage would be that the heir of the inheritance would get access to their money much quicker than having to wait for the estate to be settled. Other significant advantages of taking out an inheritance advance would be the following (please note that these benefits do not apply to all inheritance funding companies):
An inheritance advance's biggest disadvantage is that most inheritance lending companies charge higher interest fees than other lenders. Usually, the interest rate on inheritance advances varies from 10% to 40%. Some lenders explain the high-interest rates by claiming that some inheritances are never received.
Another disadvantage would be that some lenders will try to scam the borrower and take advantage of their grief. Such lenders will put the assets of the borrowers at risk.
As mentioned earlier, an inheritance advance lender may impose fees that range between 10% to 40% of the inheritance value. For example, if the heir advances $30,000 of their inheritance at a 30% interest rate, they would receive the $30,000 from the lender; however, at the end of the probate, the lender would receive an amount of $39,000.
Even though an inheritance advance is a great way to get an inheritance before the end of the probate and offers many benefits such as quick funding and an easy application process, it remains quite costly. Hiring an attorney is highly encouraged when applying for inheritance advances and loans to get the best deal and read the fine lines to avoid unwanted consequences.
The reasons why people choose loans based on inheritances vary widely, but some of the most common reasons include:
There are hundreds of other reasons for getting a loan, including some with good and some with bad financing ideas. However, it’s your inheritance, and you have the right to use it as you see fit unless there are restrictions in the will.
Probate can be an emotional time, and some people prefer to lose part of their inheritance to loan fees instead of waiting. Some estates might take years to settle. Some estates have restrictions such as funding a family allowance, paying for children’s college educations, and others. You might not qualify for an estate-based loan, or the interest rate and fees might seem too high. You should be aware of the alternatives to probate loans and the risks. It’s important to consult an attorney or financial adviser before getting any kind of inheritance-based loan.
Managing all the probate processes and figuring how much is in the estate take a lot of time – probate often takes years for large estates. That’s why many heirs seek loans to tide them over until they receive their inheritance. An irrevocable trust fund is treated as separate from the estate because it can’t be attached or taxed. When heirs receive funds from the trust, the income is subject to ordinary income tax or capital gains tax. Getting a loan on a trust fund is a different loan product that some people consider, but there are usually minimal delays in getting money from an irrevocable trust. People with lots of assets set up trust funds so that their families have immediate access to funds after their deaths.
Different lenders have their own standards for inheritance loans, but most require that beneficiaries must stand to receive property valued at $15,000 or more. You’ll need to furnish all the necessary documentation such as a death certificate, a copy of the will, and proof of your identity.
Lenders usually require the following documents before approving a loan:
The type of financing you get affects the process. If your right to the inheritance has already been confirmed, it will be easier to get the loan. Estate loans become trickier when it takes some time to sell or rent the property or divide the proceeds among multiple heirs. That’s why estate loans are repaid in monthly installments until the loan amount and interest are fully paid.
When someone dies, making a will enables the person’s assets, which are called the estate, to be transferred to survivors. Inheritances can be granted to family members and others such as friends, business associates, and charities. Small estates of people who make wills that clearly show how the estate should be divided are relatively simple to probate. However, big estates, challenges to the will, unclear ownership of assets, and dying without a will create problems that can delay the probate process.
If the deceased didn’t have a will, the probate court must determine how the estate is divided among family survivors. The court will appoint an administrator who oversees the process. That’s true for both people who had wills and those who didn’t. The administrator’s job is to assess the value of assets, determine the number of qualified heirs, and find out what the heirs want to keep and what needs to be sold to split the proceeds among the heirs.
Sometimes, administrators are instructed to pay the living expenses of people who depended on them for financial support. A family allowance might be provided immediately before the probate process is finished, but that further complicates the process of settling the estate.
Once the administrator has developed a plan, an executor is appointed to oversee the liquidation and distribution of assets.
There is currently no federal tax on inheritances, but six states charge inheritance taxes: Kentucky, Iowa, Nebraska, New Jersey, Pennsylvania, and Maryland. If you’re not related to the deceased, your taxes might be higher. You can find out the tax rate in your state at everplans.com.
Estate taxes, however, are a different story. Taxes accrue to any inheritance that’s larger than the exemption. There are 14 states and the District of Columbia that have estate taxes. Two states have both inheritance taxes and estate taxes. As of 2018, the federal government also charges estate tax when the gross assets of the estate are more than $11.18 million. You can find out about state estate taxes at taxfoundation.org.
There are many alternatives to getting an inheritance-based loan that you might want to consider. The estate’s administrator might be willing to front you some money from the estate. However, you might need to repay some of that money if there are unforeseen problems that cut into your expected bequest such as discovering unknown debts against the estate.
Another alternative protects people to whom the deceased legally owed money. This is a great example of an unknown debt that could affect inheritances. If the deceased owed you money, you could file a claim against the estate, and if your case is proven, the money would be paid to you before the estate is divided among the heirs.
If your credit is good, you might be able to get a personal loan, and these usually cost considerably less than inheritance-based loans. You can use a personal loan to pay off high-interest debts to preserve your inheritance. If you get your legacy before the personal loan is paid off, you might be able to pay it off early to save even more on interest charges.
You might also be able to borrow money from a friend, associate or family member if you can demonstrate that you will receive a lot of cash in the near future. However, you should structure this loan legally so that there will be terms, interest, and other details.
Unfortunately, some of these loans are offered by unscrupulous lenders who take advantage of grieving people. Some heirs who are expecting a big inheritance want immediate cash and are willing to take bad deals to get the money. Lenders suggest that some inheritances never come through, so that’s why they charge higher rates than a personal loan provider.
These rates often range from 10 percent to 40 percent of your inheritance proceeds, and that’s when you get a loan from an ethical lender. Crooked lenders often arrange complex loan deals that could put the property that you own at risk beyond the amount of your loan contract. One case clearly illustrated the risks of unscrupulous lenders.
A woman died leaving a will that divided her assets equally between her three surviving daughters. One daughter assigned her rights to $23,100 of her inheritance to a lender as collateral for an advance-type loan of $15,000. Just two weeks later, the daughter assigned another $38,500 of her legacy for an additional $25,000.
The woman borrowed eight additional times for a grand total of $173,510 against the assets for loans totaling $116,480. The other sisters also borrowed money. The annual percentage rate of the loans made to the three sisters totaled 913 percent.
A similar case is even more troubling. A California woman’s son assigned $26,100 against a $15,000 inheritance-based loan. The lending company’s heirship rights gave it standing in court, and the lender petitioned the court to become the deceased’s personal representative. The petition was granted, and the lender evicted tenants from the building that the deceased had owned, liquidated the building, and paid itself thousands of dollars in management fees.
Probate funding can be tricky, expensive, and fraught with hidden perils, but it can also provide necessary cash for heirs struggling with finances. Hiring an attorney, researching potential lenders, reading the fine print, and exploring alternative funding options are steps that everyone should take before committing to any type of loan.
