Pros and cons of inheritance financing
Estate financing refers to a strategy used by heirs entitled to estate property that is carried out in probate court. The succession is required to liquidate the inheritances of the deceased. The process can take several months; causing inherited assets to depreciate in value. When the decedents 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 funding source that specializes in this field. The most common sources of financing include private investors and cash advance companies. On rare occasions, banks or credit unions engage in advance loans. However, when 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 should carry out due diligence to ensure they are working with a reputable funding source. The heirs are required to assign the inheritance rights to the investor in exchange for a lump sum in cash. The heirs are not required to repay the advance. Instead, the investor receives the assets used to secure the advance once the estate is settled.
Private investors take substantial risk by bringing 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 are unable to collect the advance. They also cannot go after the heirs unless it is proven that erroneous data was provided to obtain the advance.
The process for obtaining cash for inheritance loans can vary. Most funding sources require heirs to undergo a credit and background check to determine if the applicant has outstanding debts that could interfere with payment. Funding sources must determine if the heirs have tax liens, judgments from creditors, bankruptcy proceedings, or outstanding child support or spousal support.
Funding sources generally require a copy of the decedent’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 fair market value.
Estate financing is generally offered to heirs entitled to $15,000 or more. Funding sources charge an up-front fee that is deducted from the cash advance. Fees generally range from 10 to 40 percent of funds advanced. Heirs should research multiple funding sources to get the lowest rate.
If you apply for a $10,000 cash advance and the funding sources charge 40 percent, the amount of funds received would be $6,000. However, the heirs assign inheritance rights for the full $10,000.
Heirs must determine the true cost of obtaining cash advances. The heirs will not only give up a percentage of the anticipated inheritance, but will also be charged inheritance tax on 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.