What You Need to Know About Inheritance Loans

By Jonathan Layton, J.D.

What You Need to Know About Inheritance Loans

By Jonathan Layton, J.D.

As a result of the coronavirus pandemic, unemployment rates in the United States are at an all-time high, and many Americans are strapped for cash.

Those in need of fast cash and who are due an inheritance following the death of a loved one can apply for an inheritance loan from a bank or other lending institution and, for a fee, receive cash to pay bills and other household expenses. Here's what you need to know.

Traditional Inheritance Process

When an individual dies with a will, the person named as the executor becomes responsible for the probate process, which involves taking inventory of the estate property, ensuring that all estate debts are paid, and seeing that the heirs or beneficiaries receive their rightful inheritances.

If an individual dies without a will, an administrator will be appointed to handle the decedent's estate and carry out these duties in compliance with the law applicable to the state where the decedent lived or owned property when they died.

Depending on the estate's complexity, the probate process may only take six to nine months after a probate case is opened, but in some cases, it can take years to wind up an estate. If you are an heir or beneficiary, you must wait until the probate process is completed before you receive your inheritance.

Inheritance Loans Before Probate

You may be anxious to receive funds from your loved one's estate because of an urgent need to pay outstanding bills and other expenses.

If you want to receive your inheritance immediately following the death of a loved one, you can apply to a bank or other lender for what is known as an "inheritance loan." Also referred to as an "inheritance advance," "probate loan," or "probate advance," an inheritance loan can provide you with cash while you wait for the probate process to be finalized.

How Do Inheritance Loans Work?

Inheritance loans are somewhat of a misnomer in that they are not really loans at all. Rather, they are an advance on the individual's inheritance.

When an heir or beneficiary applies for an inheritance loan, the lender first evaluates the estate and determines how much the applicant stands to inherit. The lender may offer the applicant an immediate payment of less than the full inheritance amount (with a flat fee or at a fixed interest rate) in exchange for the lender's right to receive the full inheritance amount when probate ends.

As a result, you are assigning your rights to your inheritance to the lender.

Pros and Cons of Inheritance Loans

The primary benefit of an inheritance loan is that you receive a portion of the inheritance quickly. And, because an inheritance loan is not actually a loan, no borrowing is involved and, thus, you incur no monthly payments. The estate pays the lender the applicant's inheritance amount directly. In addition, no employment, income, or credit inquiries are generated, so your credit score is not impacted. Further, no late fees or other hidden costs should arise. That's much different than a loan from a traditional bank, credit union, or other lender.

On the negative side, inheritance loans can be more expensive than a loan backed by other assets. In fact, if you choose an inheritance loan, you will almost always receive less cash from the lender than if you had waited for the probate process to be complete.

If the probate process proceeds quickly, you might regret not having waited to reap the full benefit of your inheritance. Depending upon the amount of the flat fee or interest rate charged by the lender (which can range from 10% to more than 50% of the inheritance value), the savings involved could be in the thousands.

For instance, assume the decedent left you $25,000 in their will, and you apply for an inheritance loan. While the estate is still in probate, the lender might offer you an inheritance loan of $20,000 (i.e., a 20% interest rate). You would receive the $20,000 immediately. At the end of probate, the lender then receives the full $25,000 (or whatever you stood to receive after the expenses of the estate were paid). Although such a loan can be an effective means of obtaining inheritance funding, the fees can be very costly.

When considering an inheritance loan, be sure to seek advice from an estate or tax attorney, financial adviser, or accountant before submitting your application.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.

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