Estate Advances – The Good, the Bad, and the Ugly

Introduction

As the name suggests, an estate advance is where a lender “advances” funds to a beneficiary in exchange for an assigned interest in an estate. Baby Boomers who failed to protect their estates in revocable living trusts have spawned an increase in these controversial financial transactions in probate and trust situations. Unsuspecting heirs, eager to access equity in their parents’ estates, are easy targets, which is to say not all of these lenders have your best interests at heart.

Think carefully and read on to be sure you know the Good, Bad, and Uglies (GBUs) of Estate Advances.

WHAT ARE THEY?

Estate Advances go by many names: Inheritance Advance, Probate Advance, or Probate Cash Advance. Instead of waiting for the estate to be administered through probate—which typically takes a year or longer—a beneficiary accepts an offer from a probate lender to receive cold hard cash in exchange for their interest in the parent’s or grandparent’s estate (which will be distributed at some point in the future). It sounds tempting, but it’s an expensive way to get hold of money.

The CREM Group has seen the good, the bad, and the ugly of estate advances. What are the advantages of Estate Advances? When are they not a good idea? What might you need to watch out for?  When are they useful, and who should use them? There might be options.

The Good

There are several advantages of an Estate Advance:

• It allows beneficiaries to receive money sooner than they otherwise would. Most probates take between nine months to a year and a half to complete (sometimes longer). “A bird in the hand is worth two in the bush.”
• These funds may pay off personal debts such as medical bills, credit cards, or high-interest revolving credit accounts. Or they can simply pay daily expenses that are not getting covered monthly.
• Estate advances are “assignments” and are non-recourse, meaning a beneficiary takes no personal liability from these transactions. This is unlike getting a loan, which typically requires assuming personal liability or at least pledging collateral to provide insurance for the lender in case repayment is not made.
• Some people use the money to buy the other beneficiaries’ estate shares.

It’s perhaps helpful to note that California is the only state with laws relating to probate loans. Section 11604.5 of the Probate Code requires probate lenders to file their assignment agreements with the probate court within thirty days after they are signed. “A transaction made in conformity with the California Financing Law (Division 9 (commencing with Section 22000) of the Financial Code).” This law may have its drawbacks, as you will see below.

The Bad

While gaining early access to funds may get someone out of a short- term financial jam, for instance, the disadvantages may surpass the advantages.

• The beneficiary gives up their ownership position. While they owe no money to the probate lender, they own less of the estate. When the final distribution is made, the beneficiary may have so little left they have a tiny inheritance. Depending on the loan and the estate’s total value, the interest rates could be nothing short of usury. If you receive a $10,000 probate advance on a $15,000 inheritance and the probate takes two years, then paying the $5,000 (for the loan of $10,000) is an interest rate of approximately 25%!
• The probate lenders acquire “standing” in a probate administration, which means they have established a right to file petitions or claims on behalf of the estate! Probate lenders can step into a beneficiary’s shoes and obtain the power to:

1. Petition to remove the personal representative,
2. Petition to be appointed personal representative,
3. Sue for breach of fiduciary duty,
4. Petition to force the personal representative to sell real property or file for preliminary distribution.

With this arrangement, suddenly, there is someone else in the probate mix who is not a family member. Anyone knows it’s hard enough to get through these things with just the beneficiaries. It just got harder.

• Such petitions, claims, and objections are almost always to benefit the specific probate lender and can be extremely cumbersome to deal with during an administration. Lenders are typically sophisticated parties and can make it exceedingly difficult for beneficiaries to control the administration process and the distribution of assets.
• When any of these enter the scene, the complications of probate get multiplied. Attorneys may need to step in, and that can become expensive.

The Ugly

Some critics argue that estate advancers are engaging in a form of “consumer exploitation” by offering beneficiaries small cash payments relative to the size of their inheritance. These same critics point to a lack of regulatory protections for beneficiaries by claiming that usury laws and truth-in-lending disclosure requirements are not being adequately applied to estate advancement transactions.

Detractors further claim that it’s less-well-educated and unsophisticated consumers who are more likely to be attracted by probate lenders.

Usury laws are supposed to restrict the amount of interest charged on certain types of loans. At the same time, the Truth-In-Lending Act (TILA) requires that lenders make specific disclosures to borrowers prior to signing any loan documents. A study of Probate Lending, published in a 2016-7 issue of the Yale Law Journal, cites data suggesting “that probate loans often violate usury statutes and TILA.”

The difficulty in enforcement comes from the premise that “an estate advance does not saddle the borrower with an absolute obligation to repay the principal,” so the estate advance slips through the slats of jurisprudence on a technicality. The ugly part is that some people have no idea how much they’ve “paid” in interest. It seems to them they’ve gotten “something for nothing” without going into debt.

Gray Area

Proponents of estate advancements counter these arguments by pointing out that estate advances are non-recourse. They further support their position by explaining if, for any reason, a beneficiary’s interest in the estate is reduced or eliminated, the probate lender has no option but to absorb the loss.

It is also important to point out a rule in the probate code drafted to specifically address unfair estate advancement agreements between a beneficiary and a probate lender. California Probate Code Section 11604.5 requires probate lenders to file their assignment agreements with the probate court within thirty days after they are signed. It’s a loose attempt at protecting beneficiaries. It sounds good but doesn’t amount to much.

In some circles, it’s thought that the very existence of Section 11604.5 permits probate lenders to operate outside the “normal” lending scope.

What Do We Recommend?

An estate advance is a costly option and should, therefore, only be considered in unique circumstances. Our goal was to encourage consumers to educate themselves on the loan details and terms offered by different lenders, thus allowing them to make a more educated decision before committing to a loan program.

Bottom line: Just about any loan product available on the market will likely be less expensive than moving forward with an estate advance.

Here’s our advice:

1. Make sure you understand the value of the estate you’re inheriting.
2. Get offers from many lenders, but before you take any of the loans, check with your attorney and your CPA.
3. Look at alternatives: can you get a loan from a family member? Do you have any other property to use as collateral for a loan?
4. Talk with a financial advisor and an estate attorney. Know your rights and be clear on the good, bad, and ugly of estate advances.

The CREM Group is a real estate brokerage specializing in probate real estate and trust real estate sales. We are an attorney-owned brokerage (i.e., probate realtors, probate real estate brokers). We do not engage in estate planning, probate, or trust administration services, but we can direct you to professionals that we feel are trustworthy. If you have any questions about probate or trust sales, please feel free to contact us.

If you have a legal question regarding estate advances, please contact an attorney; we are happy to recommend one if needed.