7 minute read

The Harsh Truth About Predatory Probate Lending: What You Need to Know

Have you been approached with a cash advance on your inheritance? Learn about the dangers of probate loans and how to protect yourself from predatory practices.

Mitch Mitchell

Mitch Mitchell, @MitchMitchell

Product Counsel, Legal, Trust & Will

The probate process can take months or even years. As an heir who stands to inherit a sum of money from a deceased relative, this can feel like a long time to wait. This is especially true if you are in dire need of resources.

Here, some obscure companies may approach you with a tasty sounding deal: to take out a probate loan where you get your inheritance immediately. The catch? They take out a sizable chunk when the estate proceeds are paid out.

While probate loans can be a legitimate resource for those in need, you should be wary of this potentially predatory financial practice.

What is a Probate Loan?

A probate loan is an advance payment you can receive to get your inheritance more quickly. Probate loans are also commonly referred to as:

  • Inheritance advance

  • Inheritance funding

  • Inheritance Lending

  • Probate advance

If you find out that you are set to receive an inheritance from an estate that has entered the probate process, you may be perplexed to find out that it may take months or even years to get the money. There are lenders that will give you an immediate payment, but it is an amount less than your full inheritance. When the probate case closes and payouts are made, the lender receives the full inheritance in return.

For example, let's say that your grandfather passes away and leaves you $30,000 in his Will. A lender then approaches you with an advance loan of $25,000. You get this amount right away. At the end of probate, the lender receives the full amount that you would have received.

Note that lending firms typically will not use the term "loan" because they are technically an advance, and not a loan. Therefore, they are not subject to the same consumer protection laws.

How do Probate Advances Work?

What's in it for the probate lender?

The probate lender will typically only offer an advance if they believe they will make money. This involves an independent evaluation of the estate and the amount they believe you will inherit. Then, if the inheritance appears viable, then they will offer you an immediate advance payment that is a fraction of your full inheritance amount. In exchange, the lender is assigned the claim to your inheritance and receives the full amount when the probate case concludes.

As an heir, this could be an attractive resource if you need the money sooner, especially as the length of probate is often uncertain.

Possible Drawbacks of Probate Loans

As you might imagine, there are certain arrangements that might give you instant gratification, but there are actually long-term costs.

Before you move forward with a probate advance, make sure to consider the possible downsides to make sure it's the right choice for you.

Understanding the Cost of Probate Advances

Dealing with probate advances can feel like a relief when times are tough. But, it's important to be careful and really understand the costs connected to your inheritance. The quick money might seem great at first, but you could end up losing a lot of your inheritance, especially if the probate process wraps up quicker than you originally estimated. This means you may be giving away a large chunk of your inheritance for some quick cash.

The costs of these decisions can vary greatly. Sometimes, the interest rates can be really high, even more than 100%, while most loans have interest rates capped at around 10% by state laws. What you end up paying depends on how much you get in advance, how much inheritance you're supposed to get, and how long it takes for probate to finish. It might seem hard to figure all this out, but talking to an estate planning professional can help make things clearer and help you make choices that are better for your money in the long run.

According to Consumer Reports, while probate loans do not charge interest that compounds annually, if they were calculated for APR (annual percentage rate), this is how they would compare with traditional loans:

  • 30-Year Mortgages: 3.1%

  • 60-Month Car Loans: 5%

  • Credit Card Balances: 16.3%

  • Probate Advances: 86.9%

In a different study conducted by academic researchers, the average APR on probate advances were even higher at 127%.  This demonstrates the exorbitant costs that come with taking out a probate loan.

But why are probate loans so expensive? The answer lies in the risk involved. These lenders are essentially betting on the outcome of your inheritance. If you end up receiving less than expected or your inheritance is tied up in legal disputes, they may not be able to recoup their investment.

Lenders Can Become Involved in the Probate Process

Probate loans often bring an outside party into the estate's probate process, which can complicate things. It can also potentially lead to disagreements among family and friends. Studies have shown that probate lending can cause more issues and disputes within an estate than other common issues like when someone dies without a Will, uses a handwritten Will, or disinherits someone out of their estate.

When Probate Lending Becomes Predatory

The probate lending industry is highly unregulated, with California currently as the only state to have laws that regulate these loans and advances.

There are legal loopholes that creates the space for predatory financial practices.

Let's walk in the shoes of the average person. Let's say that this person just lost a parent, and while they are grieving, they also have to tackle the maze that is the probate process. They may be experiencing financial strain. They're counting on a modest inheritance, but are crestfallen when they begin to understand that it may be months, or even a year, before they can see this money.

Enter the probate lender. They are a sophisticated financial company that is well funded, has an advanced understanding of probate, and is sharply honed in on this person's pain point.

They contact the individual and make an offer that is tantalizing. Not only can they get money immediately, they won't have to wait for the complicated probate process to end to receive the inheritance, taking away a significant load of stress and pressure off of the situation.

However, this is where the predatory behavior can take place. These lenders know exactly how emotionally taxed this average person is, and just how overwhelmed they may be by the probate process. Here, they dangle the carrot of instant gratification, but at an exorbitant cost.

Even worse, there are some lenders that offer advances that come with unfair and abusive terms. They might include hefty fees, interest rates, or deceptively-worded contracts that eventually trap the consumer into a vicious cycle of debt.

These companies succeed by specifically targeting individuals who are in need of funding and are most likely to cave to the temptation.

The financial implications for estates and their Beneficiaries are profound. Not only can these predatory loans significantly diminish the value of the estate, but they can also lead to extended legal battles, ultimately benefiting only the lenders. The original intent of the bequeathed assets is often lost or heavily compromised.

Instances of predatory lending can complicate the probate process, introducing significant delays. This issue occurs when Beneficiaries are quickly advanced loans against estate assets without having a full understanding of probate timelines, or the legal intricacies attached to the estate's disposition become tangled within the terms of the loan agreements.

How to Protect Yourself against Predatory Lenders

To protect yourself and your family, it is critical to educate and empower everyone involved in the probate process. This includes being vigilant about the financial products you are offered, never entering into agreements under duress, or without a complete understanding of the terms. Before making any significant decisions, be sure to:

  • Seek the legal and financial advice of professionals

  • Understand the value of your inheritance

  • Compare offers from multiple lenders to secure the best contract

  • Consider alternative strategies, such as obtaining a personal loan from a family member

  • Notify the Executor/Administrator of the estate

Know Your Resources

The first arguably most effective source of protection against predatory lending practices is to arm yourself, as well as your loved ones, with knowledge. For instance, you might forward this guide to your relatives who are also involved in the probate process so that they are aware of predatory lending.

Consider consulting financial and legal advisors, as well as the educational resources often provided by these services. Seek out tips on how to identify predatory behavior and how to mitigate them.

If you suspect that you may have fallen victim to predatory lending during probate, make sure to pursue redress as quickly as possible. There are a number of legal resources and organizations that can provide you with assistance.

The Federal Deposit Insurance Corporation (FDIC) recommends that you contact an attorney. Many offices provide free legal services to individuals with limited income. The American Bar Association also provides a directory of pro-bono, or free, programs provided by attorneys on a volunteer basis.

It's important that you act quickly to increase your chances of rectifying the issue at hand.

Navigate Probate with More Confidence with Trust & Will

Too often, we see individuals fall victim to predatory practices because they aren't informed or they feel disempowered. The average person who has never tackled the probate process may simply feel overwhelmed. The idea of taking a probate advance to see the money sooner, especially when you expect probate to take months or even years, may be all too attractive. Ironically, those who have the patience to navigate probate efficiently would get the full value of their inheritance instead of giving a large portion of it up to a third party. Not only does this eat into the value of the estate, it frankly degrades your loved one's legacy.

The emergence of predatory probate lending serves as a timely reminder for the need to remain educated and vigilant, guiding our actions with the knowledge of our rights and the intent to protect our legacies. By employing caution  and seeking assistance from trustworthy authorities, we can strengthen our defense against exploitative practices in our most vulnerable moments.

Don't let a probate lender take away from your loved one's legacy or the value of your inheritance. At Trust & Will, we understand that navigating the probate process can be overwhelming– but we're here to help.  Our plans provide clear, county-specific guidance and support from probate experts so you can stay on top of the process. Learn more about our probate offerings.

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