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How an Inheritance Loan Works

Learn more about the financial product that puts money in the hands of those waiting on the probate of a will.

Learn about inheritance loans.

Inheritance loans, which are sometimes called probate loans and inheritance funding, are loans that a loan provider makes to people who are scheduled to inherit money and other assets from a family member or friend. Probate often takes a long time, and many people need money for various purposes after the death of a loved one. The most common types of these loans fall into two categories: an advance loan on the assets that you’re scheduled to inherit and a loan that uses your inheritance as collateral for repayment of the loan in regular monthly payments. 

Regular banks and credit unions don’t offer these types of loan products, so you have to contact an inheritance lending company. The good news is that you can receive the money in as little as 2 or 3 days if everything’s in order and there aren’t any probate complications. The bad news is that these loan companies charge considerably higher fees than traditional lenders like banks and credit unions. 

You should also consult your lawyer first because estates and inheritance laws can be complex. There might be restrictions on certain property – such as a requirement that a home is kept in the family – that prevent you from transferring it, selling it, or using it as collateral. 

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Inheritance Advance Loans

The simplest inheritance funding is a cash loan that you repay when you receive your inheritance. The application process only takes a few minutes if you have all your documentation, and you can apply online. You don’t need good credit to get approved because you’re getting a loan using your inheritance as collateral. You repay the entire loan and interest after the estate is settled. There’s a legal lien against your share of the inheritance, so lenders run little risk of the loan not being repaid. 

It’s important to compare interest rates, terms, and each lender’s online reputation. Find out if there are any hidden fees. Read the fine print because you could lose thousands of dollars if you don’t understand your contract. The interest rate runs very high just to get your money a few months early. 

Estate-Based Loans

Estate-based loans work like personal loans that are guaranteed by collateral. Your inheritance is the collateral, and you can borrow against it. Some estate loans work like advance-type loans because you can repay the full amount when you receive your inheritance. These loans can also work like installment loans with regular monthly payments. It’s important to consider whether you can afford the monthly payments while waiting for the estate to be settled. Some lenders won’t make estate-based loans to people with poor credit. 

If you receive a loan for the entire amount of the inheritance, you don’t have to do anything after probate. The lender will receive the inheritance to settle the debt. If the loan is for part of the inheritance, that money will be deducted and given to the lender. 

What Are the Most Common Reasons for Getting Loans Based on an Inheritance?

The reasons why people choose loans based on inheritances vary widely, but some of the most common reasons include: 

  • Paying off debts
  • Covering the funeral expenses of the deceased
  • Maintaining a lifestyle that the deceased funded while alive
  • Settling claims against the estate
  • Paying for time-sensitive expenses such as college tuition
  • Covering the costs associated with settling the estate
  • Negotiating with other heirs to inherit real estate instead of cash
  • Covering daily expenses while waiting on an inheritance
  • Buying a home so that you can stop paying rent

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. ​

What to know before getting a probate loan.

What Are the Details Behind Qualifying for One of These Loans?

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. 

Documentation

Lenders usually require the following documents before approving a loan: 

  • Valid ID
  • Copy of the deceased’s will or proof of a family relationship to a deceased person who died without a will
  • Copy of the deceased’s death certificate
  • Legal documents for probate
  • Documentation of who is the estate’s executor and administrator
     

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. 

How Inheritances Work Without a Loan

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. [1] 

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. [1] 

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. [2] You can find out about state estate taxes at taxfoundation.org.

Alternatives to Getting a Loan

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. 

What Are the Risks of an Inheritance-Based Loan

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. [3] 

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. 

similar case is even more troubling. [4] 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. 

References: 

[1] Smartasset.com: How Does Inheritance Work? 
https://smartasset.com/investing/how-does-inheritance-work 

[2] Investopedia.com: Estate Tax 
https://www.investopedia.com/terms/e/estatetax.asp 

[3] Scholarship.law.wm.edu: BORROWING IN THE SHADOW OF DEATH: ANOTHER LOOK AT PROBATE LENDING 
https://scholarship.law.wm.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=3766&context=wmlr 

[4] Digitalcommons.law.yale.edu: Probate Lending 
https://digitalcommons.law.yale.edu/cgi/viewcontent.cgi?referer=https://www.google.com/&httpsredir=1&article=5774&context=ylj