Inheritance funding involves assigning inheritance property rights to a funding source in exchange for lump sum cash. Heirs sometimes engage in this type of transaction when inheritance property is suspended in probate court for an extended period of time.
Several reasons exist for obtaining inheritance funding, but the most common stems from the time it takes to settle decedent estates. Probate is the legal process used within the U.S. to settle estates that are not protected by a trust.
The average duration of probate is between 3 and 6 months, but some cases take as long as 2 or 3 years. When estates consist of valuable property such as real estate, antiques, artwork or jewelry, these assets can depreciate in value.
It is not uncommon for estate administrators to be forced to sell inheritance property to pay decedents’ outstanding debts. When real estate is secured through a mortgage note, the estate is responsible for paying loan installments, property taxes, insurance, and all expenses related to maintaining the property. These types of expenses can quickly bankrupt small estates.
It is estimated that less than 20-percent of heirs receive their full inheritance due to property depreciation or court ordered sale of assets. Assigning property rights to a funding source allows heirs to obtain cash for property that may not be as valuable or may not exist by the time the probated estate settles.
To obtain cash for inheritance, heirs must work with a funding source that specializes in this field. The most common sources are cash advance companies, investment groups, and private investors. Banks and credit unions do not engage in this type of lending, but some financial institutions will allow heirs to obtain a personal loan using pending inheritance property as collateral.
Funding sources assume considerable risk when providing cash in exchange for probated property. Inheritance funding is not the same as taking out a loan because heirs are not responsible for repayment of advanced funds. Instead, the funding source submits a creditor claim to the estate administrator and is reimbursed by the estate either in the form of cash payment or transfer of assigned assets.
If the estate is forced to sell inheritance property to payoff outstanding debts or if the estate executor must use inheritance money to cover estate expenses, the funding source cannot legally pursue the estate for reimbursement. Nor, can funding sources pursue the heir who received advanced funds. For this reason, funding sources normally assess upfront fees which can range between 10- and 40-percent of the advanced funds.
The process for obtaining inheritance funding will vary by funding source and type of inheritance property used to secure the advance. Funding sources typically require recipients to undergo a background and credit check to ensure they do not have outstanding liens or judgments that could interfere with repayment of the advance.
Heirs are usually required to provide a copy of the decedent’s last will and testament, death certificate, and contact information for the estate administrator. If property is used as collateral, heirs normally must obtain property appraisals to determine fair market value.
Funding sources generally do not provide cash advances unless heirs are entitled to at least $15,000. Heirs should engage in due diligence to ensure they are working with a reputable funding source. Heirs should also take time to comparison shop funding sources to ensure they obtain the lowest fee.
Prior to assigning inheritance rights, heirs should calculate the true cost of obtaining the cash advance. In addition to paying funding source fees, heirs may be assessed inheritance tax against the full amount of their gifts. It is best to consult with a tax accountant or probate lawyer to determine if exchanging rights for a cash advance is the best financial decision.
