Dealing with the passing of a loved one is already a difficult process. Add to this the administration process of the will and estate, and it can become a lot to deal with. The probate process alone can drag on for 6 months to 3 years.
What if the heirs require access to the estate’s funds in the meantime? The executor of an estate may need to pay for funeral expenses, discharge debts, or settle claims on the estate. Without cash on hand, this can be a difficult situation. This is where estate loans can be helpful.
What Is an Estate Loan?
An estate loan (also known as probate loan or inheritance loan) is a type of short term financing for heirs of an estate. The loan is secured against the assets contained within the estate (which are currently tied up from the administration process).
As mentioned earlier, the processing of an estate can take anywhere from 6 months to up to 3 years. Within this time, the heirs of the estate may need funds to cover funeral costs, etc. An estate loan helps bridge the gap between when assets are tied up in the probate process, and when the assets are finally distributed to the heirs. The loan is repaid once the estate assets are released from administration.
Why Use Estate Loans instead of Other Options?
Most banks are unwilling to loan money to an estate that is in probate or to trusts. This is because the assets in a deceased’s estate are currently tied up in administration or the probate process.
Estate loans are similar to bridging finance loans, offering a solution for short term financing, where banks are unable to do so. Once the administration process is over, the loan is repaid and can be replaced with more conventional options, such as a mortgage.
How Do Estate Loans Work?
An example of a common usage for estate loans is where heirs are left with an inheritance property. There is often more than one heir to the inheritance property and they may have different ideas on how to distribute the property.
One heir may decide they want to keep their share of ownership in the property, while the second heir may want to cash out their share of ownership. In this scenario, an estate loan can be taken out against the property in the estate. The proceeds of the loan can then be used to pay off the second heirs interest in the property, and the ownership of the property is then deeded to the first heir.
After the title of the property is transferred to the heir who wants to keep ownership, they can then refinance the estate loan to a lower cost conventional loan.
Another common usage for an estate loan is to fulfill the obligations of an estate. Some of these include settling debts from the estate, legal fees, funeral expenses and making repairs to a property.
Finally, an heir may take out an estate loan simply because they want an advance on their inheritance. The probate process is lengthy, and an estate loan will allow them to access part of their inheritance before the probate process is finalized.
Depending on your situation, an estate loan can be a helpful solution when undergoing a difficult time. Consider seeking legal and financial advice before making the decision to use an estate loan.