Probate is the court-supervised process of administering and closing an Estate after someone passes away. There are a number of factors that can extend this process -- and delay the distribution of assets and inheritances. If you need to receive an inheritance before probate ends, a probate advance or loan may be a viable option.
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Probate advances and probate loans are two financial instruments that can allow individuals to receive a portion of an inheritance early; however, these funds do not come for free. The following guide will break down everything you need to know about probate advances and loans, including when you should move forward with one of the options.
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What is a Probate Advance?
A probate advance is a cash advance of an inheritance provided by a third-party lender. These agreements are made on the condition that you receive a portion of your inheritance up front, and the lender is paid back with the full inheritance once probate is complete. They are sometimes referred to as inheritance advances or probate cash advances.
Probate advances result in a smaller inheritance than you would receive directly from the Estate; however, they are still a valid option for individuals who want their inheritance on a faster timeline. There can be a number of financial reasons for this decision, or it could just be because probate is expected to be lengthy.
How Does a Probate Advance Work?
The probate advance process starts with a consultation with the potential lender. This is where you will get an idea of the possible terms and amount for the advance. The lender will ask for information on the Estate, your expected inheritance, and the number of beneficiaries.
To move forward with the process, the lender will require certain case documents. Typically, they will reach out to the Executor to verify probate information. The next step is to agree on the advance amount, and then to legally assign your inheritance claim to the lender. The funds can then be wired to you in a matter of days.
Probate advances do not require monthly repayments or charge interest in the traditional sense. Instead, the difference between the loan amount and total inheritance can be used to determine the effective interest rate. The example below will help better illustrate the process.
Probate Advance Example
Ashley wants to receive a probate advance on her inheritance from her grandmother. A lender offers her $20,000 of her original $25,000 inheritance. Ashley expects probate to take well over a year, so she accepts the advance to receive her inheritance sooner. Probate ultimately takes 18 months.
In this case, the difference between her inheritance and advance amount is $5,000. Because probate took 18 months, her effective interest rate comes out to around 16 percent. This tradeoff is worth it to Ashley to receive the money 18 months earlier.
However, if probate only took 5 months the effective interest rate would be around 56 percent. If she expects probate to move quickly, accepting this advance may not be the best decision financially.
Pros of Probate Advances
Faster access to funds: A probate advance can take as little as a few weeks to process.
No interest payments: Lenders essentially charge a flat fee by taking a portion of the final inheritance.
No monthly costs: You do not have to repay anything until the final inheritance is granted by probate court.
Lender Involvement in probate: Because the lender now has a vested interest in your inheritance, they will see that the funds are properly distributed.
No hidden fees: Unlike some forms of financing, there should not be any additional fees associated with a probate advance.
“Cons” of Probate Advances
With a probate advance, you should generally expect to lose some portion of your total inheritance -- as this is the tradeoff for receiving instant access to the funds (at least in the eyes of the lender). Financially speaking this is one of the biggest cons associated with a probate advance.
There is also the possibility to stir up family conflict by getting a lender involved in the probate process. For example, if you have a large family and get a lender involved others may be upset that you are receiving your inheritance early. It’s extremely important to inform the Executor of your plans as well, as a lender will have to contact them to verify certain information.
When is a Probate Advance a Good Option?
A probate advance is a good option if the above tradeoffs make sense for the Estate and your financial needs. For example, let’s say you are planning to buy a house and need additional money for the down payment. A probate loan could represent one option for receiving those funds sooner than expected.
A probate advance might also be a good option if the process is expected to stall. If you know there will be family disputes, or other complications a probate advance can allow you access your inheritance while the Estate is still being settled.
Finally, a probate advance may be the right route if you are okay compromising a portion of your inheritance. Many people would rather wait to receive the full amount, but in the case of a large inheritance you may prefer to receive the money sooner. The right decision will depend on your specific situation.
What is a Probate Loan?
A probate loan is the act of borrowing money against your future inheritance, through the use of a hard money lender. The loan must then be repaid on a monthly schedule with interest. Probate loans are a relatively recent development, though specialized probate lending companies are becoming more common.
Pros of Probate Loans
Avoid waiting for probate: Similar to probate advances, these loans allow you to receive your inheritance before probate concludes.
Unique financing opportunity: If you have been struggling to obtain other financing options, such as a personal loan, probate loans may be a new option to consider.
Loan can be used for anything: There are no restrictions on what you can use the money for (just like with probate advances).
“Cons” of Probate Loans
A serious downside to consider is the possibility for step interest and a high monthly repayment. These could undermine the benefit of receiving your inheritance funds early. It is also crucial to ensure there are no early repayment penalties, in case probate concludes sooner than expected.
Probate loans are typically not granted for the full inheritance amount. You will only be able to borrow the approved amount, and therefore will still be waiting on a portion of your inheritance. Finally, as with probate advances, there is the potential to cause family conflict by involving a lender in the probate process.
When is a Probate Loan a Good Option?
A probate loan might be a good option if you need financing and do not have other options. While these loans are by no means a last resort, they should demand careful consideration. They are typically used when probate is expected to be complicated.
For example, if you know a relative’s Estate is going to take several months to close you might want to apply for a probate loan. That way you can receive a portion of the inheritance without necessarily signing over your future right to receive it.
Probate Advances vs. Probate Loans - Which Is Better?
If you need to access an inheritance before probate ends, the two main options are a probate advance or probate loan. The two options are very structurally different, starting with the repayment requirements. Probate advances require a flat fee from the total inheritance, while probate loans charge interest over time.
In general probate advances are the preferred choice because of the lack of interest. Advances, do however, still require a lender to get involved in the probate process which has the tendency to stir up family conflict. If you need immediate financial support from an inheritance here are the main differences to consider:
Flat fee taken from inheritance
Approval based on probate
No credit check
No hidden costs or added expenses
Monthly interest charged at set rate
Approval based on probate and personal finances
Could be charged loan underwriting fees
As you review the above information, consider how an advance or loan could impact your financial situation. Would you prefer to have monthly payments, or a one time fee pulled from your inheritance? Both options can provide you with access to a portion of your overall inheritance in a matter of weeks.
The choice can also be influenced by how long probate is expected to take. If you believe the Estate will stall in court for well over a year, an advance might be the better option. That way, you aren’t being charged interest for such a long period while waiting on your inheritance.
A probate advance can provide you with inheritance funds earlier than expected, as long as you agree to the lender’s overall fee. For those in need of the extra funds now, this cost is a small tradeoff to make for the future. As you evaluate your options, consider the pros and cons of a probate advance vs a probate loan -- you never know which one will best meet your needs.