If you expect to receive an inheritance from an estate that is in probate, you may be able to get a portion of your inheritance faster as a probate advance. In exchange for an immediate payment to you (an amount smaller than your full inheritance), the probate lender receives your full inheritance when probate ends. This type of advance on your inheritance can be attractive, since probate can take many months or even years, during which the money is tied up. But there are downsides to probate advances, including how much of the inheritance you end up giving away.
Example: Your aunt leaves you $15,000 in her will. While her estate is in probate, a lender evaluates your aunt's estate and your potential inheritance and offers you a probate loan of $10,000. You get that money right away, and at the end of probate, the lender receives whatever you would have received.
The probate lender evaluates the estate and how much you stand to inherit. If the lender believes it is likely to make money on an agreement with you, it will offer you an immediate payment of less than your full inheritance in return for the right to receive the full amount when probate ends. (In legalese, this is an assignment of your claim to your inheritance.) So, you will get less than you originally expected, but you will receive that money sooner, regardless of how long or how uncertain a probate may be.
A probate advance is also referred to as an inheritance advance, immediate inheritance funding, inheritance lending, and probate lending. You might also hear the term "probate loan" to refer to this concept. A probate loan can refer to a differently structured type of inheritance lending, in which your inheritance is used as collateral for a loan. But many people also use "probate loan" interchangeably with the type of probate advance discussed in this article, and we do, too.
Probate lending firms may object to the use of the word "loan" because they argue that probate advances are not actually loans, and therefore not subject to the same consumer protection laws. Whether a probate advance is in fact a loan feeds into an ongoing debate about the need to better regulate this industry, which is still relatively new.
Although you may like the idea of getting your inheritance early, there are many reasons to be skeptical and cautious about probate loans. Before you proceed with a probate advance, inform yourself thoroughly of the significant drawbacks.
Probate advances or probate loans may cost a lot, especially in relation to what you gain. For example, if you get a probate loan and the probate turns out to be relatively quick, you may lose a significant portion of your inheritance for the small advantage of getting the money just a few weeks or months earlier. Depending on the length of the probate, the effective interest rate can range from a somewhat reasonable rate to over 100%. (For comparison, most states regulate the loan industry by capping annual interest rates at around 10%.)
The calculation all depends on the amount the lender offers you, the amount you would have actually inherited, and the length of time between when you get your advance and when the lender receives payment after probate is completed. This may be hard to predict, but consulting an estate attorney may help.
You can see how this might work in the following examples.
Example 1: You receive a $10,000 probate advance on a $15,000 inheritance—so you chose to forego $5,000 for the benefit of getting the money early. The probate is unusually long; it takes two years. Paying $5,000 over two years for a loan of $10,000 is equivalent to an interest rate of 25%. This is already much higher than the terms on most (legal) loans.
Example 2: The facts are the same, except that the probate is of average length (6 months). Paying $5,000 over 6 months for a loan of $10,000 is equivalent to an interest rate of 60%—a truly, truly terrible rate.
In a recent study of probate advances in California (currently the only state that requires probate lenders to file their contracts with the probate court), researchers discovered that the effective average APR (annual percentage rate) on the advances was a whopping 127%. California has laws prohibiting regular lenders from exceeding APRs of 10%.
Probate advances also introduce a stranger into the estate's probate case, and this may disrupt what might otherwise be a relatively conflict-free process among family and friends. In fact, data from legal researchers indicates that probate lending is more likely to create conflict in an estate than any other common source of conflict, including intestacy, holographic (handwritten) wills, or disinheriting family members (David Horton & Andrea Cann Chandrasekher, Probate Lending, 126 Yale L.J. 102, 157-60 (2016)).
As mentioned above, the probate lending industry is relatively new and largely unregulated. As a result, lenders can and do prey upon consumers. This is especially disconcerting because lenders tend to be sophisticated, well-funded businesses that understand probate, while consumers tend to be people of average means with very little understanding of probate or other estate-related issues. This makes it easy for probate lenders to take advantage of consumers.
To date, California is the only state to pass laws that regulate probate loans and advances (Cal. Prob. Code § 11604.5). If you have questions or concerns about the laws related to probate loans in your state, do not hesitate to get help from an attorney.
If you are considering a probate loan, don't make the decision lightly. Take some time to evaluate whether it is a good option for you.
Despite the downsides, probate loans may still be a reasonable choice for some people. For example:
Remember that other options exist. You could ask a family member for a loan or try to get a personal loan. Some lenders will also provide loans using inheritance as collateral, similar to a mortgage. Lenders who make these types of loans will require monthly payments on the loan. On the other hand, the probate lenders discussed in this article take your place in probate, assuming some risk of not being repaid.
If you think that a probate loan might be right for you, lenders are easy to find. Perform an internet search for "probate lending" or "probate advances" in your state. As discussed above, contact several lenders, compare their offers, and seriously consider getting advice from an attorney who is familiar with probate lending.
Also, probate lenders may contact you. Probate cases, like other court filings, are public records so lending companies can track the inventories, values, and beneficiaries of estates in probate. In some states, especially California, probate lenders will keep an eye on active probate court records and may contact eligible beneficiaries to see if they are interested in probate lending.
Get help from an attorney if you have any concerns about going forward with probate lending.