Liza Horvath, Senior Advocate: Sharing your inheritance with a heartless opportunist
Question: I am fortunate to be receiving an inheritance from my aunt and her estate is going through probate. I am astonished by the number of solicitations I’ve received from “probate loan” companies. They are offering to give me money now and then, once the probate is done, I can pay them back. While I don’t necessarily need the money right away, it would be convenient to have the money now and not wait a year for the probate to be completed. My nephew also got the same solicitations. Is there a downside to getting our money now and then paying the probate lender back when we finally get our funds?
Answer: The major downside is the cost of the money and I strongly recommend you think carefully before you say yes to these lenders. These loans go by the names like “probate advance lenders” or “my inheritance cash” and are considered hard money loans. There are basically two options when it comes to borrowing against your future inheritance in a probate situation: a probate loan or a probate advance.
With a probate loan, you must qualify as you would for a bank loan. The lender asks for details of your personal finances and income, a credit check is performed and it is common to be charged loan underwriting fees. There may also be further upfront costs in the form of points and the lender requires that you make monthly payments of principal and interest on the amount borrowed. Finally, the loan will be cross collateralized against your personal assets. In this way, if your distribution from the probate falls short of full repayment of the probate loan, the lender can go after your personal assets to recoup their money.
A probate advance may not require monthly payments and qualification is not required – so no credit check or cross collateralization of your assets. The lender does not quote an interest rate, in the traditional sense. Instead, the lender of a probate advance gives you funds now and, when the exact amount you will be receiving is determined, they calculate the “interest” by using the difference between what they advanced and the amount you will actually receive from the probate.
According to a study published in The Yale Law Journal in October 2016, California ranks among the highest states in the use of probate loans. Whether you receive a loan or an advance, you will pay hefty fees on the money and these inheritance-purchasing companies are condemned in the legal communities and the courts as predatory lenders. These loans are big business and the effective interest in all the cases reviewed in the Yale study found the interest rates to be usurious.
You state that you don’t necessarily need the money right now, but it would be convenient. Consider this: It is assumed you did not know when your aunt would die, and you may not have even known that you would be a beneficiary of her estate. It can be further assumed you did not enter any financial obligations based on receiving this inheritance now – or even a year from now, so why give up so much to have the money now rather than wait for the probate to distribute?
Beneficiaries of probates should know that an executor can make a preliminary distribution in a probate if there is good reason to do so. This means that if an urgent financial need came up for you or your nephew, you could ask the executor to make a preliminary distribution from the probate. The executor would need to agree and court approval would be sought, but it can be done.
Your aunt, most likely, worked hard, saved money and envisioned her estate coming to you and your nephew. She wanted the funds to benefit you, not some random money lender. Be patient. Yes, probates normally take a year or so to settle, but at least you will receive all that your aunt left to you. She did not, most likely, intend that you share her loving bequest with heartless opportunists.
Liza Horvath has more than 30 years of experience in the estate planning and trust fields and is the president of Monterey Trust Management, a financial and trust management company. This is not intended to be legal or tax advice. Questions? Email liza@montereytrust.com or call (831)646-5262
