Pros and cons of estate financing
Estate financing refers to a strategy used by the heirs entitled to the property of the estate that takes place in the probate court. Probate is required to settle the estates of the deceased. The process can take several months; causing inherited assets to depreciate in value. When the deceased have outstanding debts, there is a possibility that the assets will need to be sold to cover expenses.
Heirs who choose to obtain estate financing should locate a financing source that specializes in this field. The most common funding sources include private investors and cash advance companies. On rare occasions, banks or credit unions engage in advance lending. However, when the heirs are entitled to titled property, such as real estate or motor vehicles, banks may allow the heirs to use the property as collateral and enter into a secured loan.
Heirs must carry out due diligence to ensure that they are working with a reputable funding source. The heirs are obligated to assign the inheritance rights to the investor in exchange for a lump sum of cash. The heirs are not required to return the advance. Instead, the investor receives the assets used to secure the down payment once the estate is settled.
Private investors take a substantial risk when putting in cash for inheritance loans. In addition to having to wait for the probate to be completed, they also face the very real possibility that the estate will be forced to sell assets to cover outstanding debts. Investors have no legal recourse to pursue the estate if they cannot collect the advance. Nor can they prosecute the heirs unless it is proven that erroneous data was provided to obtain the advance.
The process for getting cash for inheritance loans can vary. Most financing sources require heirs to undergo a credit and background check to determine if the applicant has any outstanding debts that could interfere with payment. Funding sources must determine whether the heirs have tax liens, creditor judgments, bankruptcy proceedings, or pending child support or spousal alimony.
Funding sources generally require a copy of the deceased’s last will and death certificate. Funding sources contact the estate administrator to verify ownership of the estate. In some cases, they will also require property appraisals to determine the fair market value.
Estate financing is generally offered to heirs entitled to $15,000 or more. Funding sources charge an upfront fee that is deducted from the cash advance. Fees generally range from 10 to 40 percent of funds advanced. The heirs should investigate multiple sources of financing to obtain the lowest rate.
If the estate requests a $10,000 cash advance and the funding sources collect 40 percent, the amount of funds received would be $6,000. However, the heirs assign inheritance rights to the full $10,000.
Heirs must determine the true cost of getting cash advances. The heirs will not only give up a percentage of the anticipated inheritance, but will also be charged inheritance tax for the full amount. It is advisable to consult with a probate attorney or tax accountant to determine if estate financing is a smart financial option.