What is an Inheritance or Probate Advance?
September 15th, 2023
Have you ever stood outside a shop, waiting for it to open, while staring through the window at the very thing you need? It’s right there, yet you have no access to it. If you have had this frustrating experience, you can probably imagine what it is like to be entitled to a much-needed inheritance, but have to wait for the estate to go through probate before you can receive them.
Inheritance advance companies, also known as probate advance companies, were created to respond to the needs of people who are waiting for the probate of a loved one’s estate to be completed, but who need cash now. Ideally, inheritance cash advances offer a “win-win” situation: the heir gets the money they need without delay, and the company makes some profit. Since probate estates often take months, and sometimes more than a year, to complete, you can understand why someone in a difficult financial position might want to receive their inheritance sooner.
If you are considering seeking an inheritance advance, you should be aware of what they are and how they work, as well as potential pitfalls.
What is a Probate Cash Advance, and How Does It Work?
With a probate advance or inheritance advance, a third-party lender not associated with the estate makes a cash advance to a person who is entitled to an inheritance in exchange for a fee. The heir or beneficiary assigns their right to the inheritance over to the lender, who collects and keeps the inheritance when it is distributed from the estate.
The heir or beneficiary must provide information about the estate and their inheritance to the lender; the lender then takes steps to verify that information with the personal representative of the estate. Generally, the lender is able to make a payment to the heir or beneficiary within a few weeks, as opposed to many months. Sometimes, a payment can be made within days or even hours.
Here’s an example of how it works. If your grandfather died leaving an estate worth $200,000 to you and your three siblings in equal shares, you would be entitled to $50,000 when the estate is distributed. But let’s say that you are behind on your mortgage and need money now. You could contact a probate advance company, provide them with copies of the will, death certificate, and other documents to prove your identity and entitlement to a portion of the estate.
The probate advance company would verify the information and offer to pay you a portion of your inheritance now in exchange for a fee. Probate advance fees can vary from 10% to 50% of the amount of the inheritance; a 20% fee is not uncommon. That may sound like a lot, but it can be worth it depending on how serious your need is and how long the probate process is expected to take. If you agree to the terms offered by the probate company, you receive an immediate payment. When the estate is distributed, the lender takes their fee. If there is any portion of your inheritance left above and beyond the agreed-upon fee, the lender pays it to you at that time.
For instance, let’s say that in the scenario above, you wanted $20,000 to bring your mortgage payments current, and the lender charged you 20% of your inheritance in exchange for the advance. You would be paid $20,000 of your $50,000 by the lender at the outset. When the estate is distributed many months later, the lender claims their $10,000 (20%) fee, and pays you the remaining $20,000 to which you are entitled.
What Are the Pros and Cons of Inheritance Advances?
Inheritance cash advances have a number of advantages, including:
- You get a portion of your inheritance without having to wait, potentially for months or years
- Because the lender now has a stake in the probate process, they have a vested interest in seeing that the estate is properly distributed
- Because of how the advance arrangement is structured, you don’t need to make repayments or pay interest to the lender
- Credit checks are not usually required
- There tend not to be hidden fees with probate advances, unlike some other financing arrangements (but read your agreement carefully)
- Depending on the terms of your agreement, the lender may bear the risk of your inheritance turning out to be less than you originally expected, and they may be entitled to a smaller fee as a result
Of course, there are disadvantage to the probate cash advance process as well:
- You will not receive the full amount of your inheritance, and probate advance fees may be significant
- If probate resolves sooner than anticipated, you may end up paying a hefty fee to a lender for relatively little advantage
- Family members may be resentful that you received your inheritance funds months before they did; you may need to disclose your personal financial business in order to calm resentments
- Depending on the terms of your inheritance advance agreement, if your inheritance is less than you initially anticipated, you may still need to pay the full fee to which you agreed, which could cause financial hardship
As you can see, it’s important to do a cost-benefit analysis when deciding whether to seek an advance on inheritance. A cash advance may be a good idea if probate is anticipated to be a lengthy process and your current financial need is great—but it doesn’t come without a cost. In many cases, if you can afford to wait for your inheritance, you may be better off doing so.
Is an Inheritance Advance the Same Thing as an Inheritance Loan?
We’ve used a lot of terms interchangeably in this article: probate advance, inheritance advance, probate cash advance, etc. It would be easy to assume that “inheritance loan” or “probate loan” means the same thing. In fact, there is an important difference.
With an inheritance loan, you are borrowing a certain sum of money from a lender and you are personally obligated to repay it. Even if your inheritance turns out to be much less than you thought it would be, your loan repayment obligation remains the same.
Because an inheritance loan is a traditional loan, you will likely need to submit to a credit check to be granted a loan. If the credit check suggests that you are not financially stable, you could be denied a loan or granted one at high interest rates. If the repayment period is long, the amount of interest charged could be significant. However, as noted above, there is no interest owed on an inheritance advance payment.
If you are expecting an inheritance and would like to receive the funds as soon as possible, speak with an experienced probate attorney to determine whether you should consider a probate advance. To learn more, contact Gudorf Law Group to schedule a consultation.