Yes, an inheritance advance, also known as a probate advance, is legal. In at least two states, California and New York, probate advances are regulated.
What is a Probate Advance?
A probate advance is an arrangement with a financial firm whereby the firm purchases a portion of an inheritance at a discount from a beneficiary at a discount. The probate advance firm hopes to collect more from the purchased inheritance than it paid out to the beneficiary.
As an example, assume that an estate has two equal beneficiaries, and the estate is valued at $225,000. The debts and expenses are expected to be around $25,000, leaving $100,000 for each of the beneficiaries. One beneficiary, in immediate need for cash, agrees to sell 25% of his expected inheritance (25% of $100,000, or $25,000 of the inheritance) for $15,000. So, the beneficiary receives $15,000 today, and the probate advance firm hopes to receive $25,000 from the estate when the estate is able to make distribution.
Of course, the amount eventually distributed to the probate advance firm could be more or less than the $25,000. Indeed, if a new will appears after the probate advance has been made, naming different individuals as the beneficiaries of the estate, the probate advance firm could receive nothing, causing a $15,000 loss to the probate advance firm.
Is a Probate Advance a Loan?
No, a probate advance is not a loan, for several reasons. First, the beneficiary is not borrowing from the probate advance company, but is instead selling a portion of an inheritance expected to be received in the future. Second, the beneficiary owes no interest or anything else to the probate advance company. Finally, if the inheritance turns out to be less than expected (or ends up being zero because, for example, a new will is uncovered leaving the person receiving the advance – and necessarily the probate advance company – zero), the person who sold a portion of the inheritance owes the probate advance company nothing.
Is a Probate Advance Legal?
Yes. An inheritance or probate advance is legal. The probate advance transaction is nothing more than the sale of an asset from one party to another – a type of legal transaction that takes place millions of times a day in the United States. Several states, however, have enacted some legal rules to make sure that a probate advance company cannot take advantage of a beneficiary and his or her inheritance.
Is a Probate Advance Legal in California?
Yes. Probate advances are perfectly legal in California and California has enacted a law to make clear that an inheritance or probate advance is legal. Section 11604.5 of the California Probate Code provides some basic and common sense safeguards to beneficiaries considering selling a portion of their inheritance:
(a) This section applies when distribution from a decedent’s estate is made to a transferee for value who acquires any interest of a beneficiary in exchange for cash or other consideration.
(b) For purposes of this section, a transferee for value is a person who satisfies both of the following criteria:
(1) He or she purchases the interest from a beneficiary for consideration pursuant to a written agreement.
(2) He or she, directly or indirectly, regularly engages in the purchase of beneficial interests in estates for consideration.
(c) This section does not apply to any of the following:
(1) A transferee who is a beneficiary of the estate or a person who has a claim to distribution from the estate under another instrument or by intestate succession.
(2) A transferee who is either the registered domestic partner of the beneficiary, or is related by blood, marriage, or adoption to the beneficiary or the decedent.
(3) A transaction made in conformity with the California Finance Lenders Law (Division 9 (commencing with Section 22000) of the Financial Code ) and subject to regulation by the Department of Business Oversight.
(4) A transferee who is engaged in the business of locating missing or unknown heirs and who acquires an interest from a beneficiary solely in exchange for providing information or services associated with locating the heir or beneficiary.
(d) A written agreement is effective only if all of the following conditions are met:
(1) The executed written agreement is filed with the court not later than 30 days following the date of its execution or, if administration of the decedent’s estate has not commenced, then within 30 days of issuance of the letters of administration or letters testamentary, but in no event later than 15 days prior to the hearing on the petition for final distribution. Prior to filing or serving that written agreement, the transferee for value shall redact any personally identifying information about the beneficiary, other than the name and address of the beneficiary, and any financial information provided by the beneficiary to the transferee for value on the application for cash or other consideration, from the agreement.
(2) If the negotiation or discussion between the beneficiary and the transferee for value leading to the execution of the written agreement by the beneficiary was conducted in a language other than English, the beneficiary shall receive the written agreement in English, together with a copy of the agreement translated into the language in which it was negotiated or discussed. The written agreement and the translated copy, if any, shall be provided to the beneficiary.
(3) The documents signed by, or provided to, the beneficiary are printed in at least 10-point type.
(4) The transferee for value executes a declaration or affidavit attesting that the requirements of this section have been satisfied, and the declaration or affidavit is filed with the court within 30 days of execution of the written agreement or, if administration of the decedent’s estate has not commenced, then within 30 days of issuance of the letters of administration or letters testamentary, but in no event later than 15 days prior to the hearing on the petition for final distribution.
(5) Notice of the assignment is served on the personal representative or the attorney of record for the personal representative within 30 days of execution of the written agreement or, if general or special letters of administration or letters testamentary have not been issued, then within 30 days of issuance of the letters of administration or letters testamentary, but in no event later than 15 days prior to the hearing on the petition for final distribution.
(e) The written agreement shall include the following terms, in addition to any other terms:
(1) The amount of consideration paid to the beneficiary.
(2) A description of the transferred interest.
(3) If the written agreement so provides, the amount by which the transferee for value would have its distribution reduced if the beneficial interest assigned is distributed prior to a specified date.
(4) A statement of the total of all costs or fees charged to the beneficiary resulting from the transfer for value, including, but not limited to, transaction or processing fees, credit report costs, title search costs, due diligence fees, filing fees, bank or electronic transfer costs, or any other fees or costs. If all the costs and fees are paid by the transferee for value and are included in the amount of the transferred interest, then the statement of costs need not itemize any costs or fees. This subdivision shall not apply to costs, fees, or damages arising out of a material breach of the agreement or fraud by or on the part of the beneficiary.
(f) A written agreement shall not contain any of the following provisions and, if any such provision is included, that provision shall be null and void:
(1) A provision holding harmless the transferee for value, other than for liability arising out of fraud by the beneficiary.
(2) A provision granting to the transferee for value agency powers to represent the beneficiary’s interest in the decedent’s estate beyond the interest transferred.
(3) A provision requiring payment by the beneficiary to the transferee for value for services not related to the written agreement or services other than the transfer of interest under the written agreement.
(4) A provision permitting the transferee for value to have recourse against the beneficiary if the distribution from the estate in satisfaction of the beneficial interest is less than the beneficial interest assigned to the transferee for value, other than recourse for any expense or damage arising out of the material breach of the agreement or fraud by the beneficiary.
(g) The court on its own motion, or on the motion of the personal representative or other interested person, may inquire into the circumstances surrounding the execution of, and the consideration for, the written agreement to determine that the requirements of this section have been satisfied.
(h) The court may refuse to order distribution under the written agreement, or may order distribution on any terms that the court considers equitable, if the court finds that the transferee for value did not substantially comply with the requirements of this section, or if the court finds that any of the following conditions existed at the time of transfer:
(1) The fees, charges, or consideration paid or agreed to be paid by the beneficiary were grossly unreasonable.
(2) The transfer of the beneficial interest was obtained by duress, fraud, or undue influence.
(i) In addition to any remedy specified in this section, for any willful violation of the requirements of this section found to be committed in bad faith, the court may require the transferee for value to pay to the beneficiary up to twice the value paid for the assignment.
(j) Notice of the hearing on any motion brought under this section shall be served on the beneficiary and on the transferee for value at least 15 days before the hearing in the manner provided in Section 415.10 or 415.30 of the Code of Civil Procedure .
(k) If the decedent’s estate is not subject to a pending court proceeding under the Probate Code in California, but is the subject of a probate proceeding in another state, the transferee for value shall not be required to submit to the court a copy of the written agreement as required under paragraph (1) of subdivision (d). If the written agreement is entered into in California or if the beneficiary is domiciled in California, that written agreement shall otherwise conform to the provisions of subdivisions (d), (e), and (f) in order to be effective.
Very few cases have analyzed this statutory provision. One case, In Re Estate of Castrillo, No.A133446 (Cal. 1st Dist. 2012, unpublished), held as follows:
A lien assignment against a distributive share of a probated estate can be enforced under section 11604. (Estate of Kerr (1966) 63 Cal.2d 875.) It is improper for a probate court to refuse to honor a valid assignment. (Wilkenson v. Linnecke (1967) 251 Cal.App.2d 291, 295.)
Is a Probate Advance Legal in New York?
Yes, an inheritance advance is legal in New York. New York has enacted a law to make sure that beneficiaries selling a portion of their inheritance are treated fairly, as follows:
13-2.3 Powers of attorney in relation to decedents’ estates required to be in writing and recorded
(a) Every power of attorney relating to an interest in a decedent’s estate and every conveyance or assignment of an interest in an estate, or similar instrument, which contains an express or implied authorization or delegation of power to act thereunder shall be in writing and acknowledged or proved in the manner prescribed by the laws of this state for the recording of a conveyance of real property and, subject to the rules or order of the surrogate hereinafter provided, shall be recorded in the office of the surrogate granting letters on such decedent’s estate or, if no such letters have been granted, in the office of the surrogate having jurisdiction to grant them. Such recording confers on the surrogate jurisdiction over the grantor of such power of attorney, the attorney in fact therein named and any other person acting thereunder. No attorney in fact named in any power of attorney or in such other instrument nor any person acting thereunder shall perform any act under such instrument unless it has been duly recorded.
(b) The surrogate may:
(1) Prescribe by rules of court or by order, consistent with the provisions of this section, the form, content, manner of execution and the conditions attached to the recording of every such instrument.
(2) Inquire into and determine the validity of every such instrument and require proof of the amount of compensation or expenses charged or to be charged by the attorney in fact and every person acting thereunder.
(3) In a proceeding authorized by SCPA 2112 or in any appropriate proceeding, fix and determine the validity and reasonableness of such compensation and expenses, whether or not the same have been previously fixed by agreement and whether or not fixed in the instrument so recorded, or otherwise.
(4) Prescribe regulations and exact a bond or undertaking to assure the payment of funds to the principal.
(c) Notwithstanding any provision contained therein, no power of attorney or other instrument which designates an agent to act for the principal shall be irrevocable, nor shall any agreement for the compensation of, or the payment of expenses by the attorney in fact or other person acting under the instrument create a power coupled with an interest in the subject matter of the agency or render the instrument irrevocable.
(d) Nothing contained herein shall authorize the practice of law by an attorney in fact or other person acting under an instrument described in this section, who is not an attorney duly licensed to practice law in the state of New York.
(e) Notwithstanding the provisions of any other statute or rule, no instrument containing a delegation of powers, assignment of interest, fee arrangement, or any instrument of like import created for the purpose of participating on behalf of an individual in any application seeking the recovery of property pursuant to section fourteen hundred sixteen of the abandoned property law or section thirteen hundred ten of the surrogate’s court procedure act, nor any power of attorney, shall be accepted for filing or recording by the surrogate’s court of a particular county unless the amount at issue is in excess of one thousand dollars or a fiduciary, as that term is defined by subdivision twenty-one of section one hundred three of the surrogate’s court procedure act, has been appointed, or a proceeding for the appointment of a fiduciary is pending in such court. The provisions of paragraph (b) of this section shall apply to all instruments eligible for filing and recording hereunder.
Is a Probate Advance Subject to the Truth in Lending Act?
No. The Truth in Lending Act (“TILA”) is Federal legislation that protects consumers against inaccurate or unfair credit billing practices. One reported federal case from the Southern District of California, Reed v. Val-Chris, holds that a probate or inheritance advance is not subject to TILA’s legal requirements.
As to the first transaction between Plaintiff and AI, Plaintiff asks the Court to characterize a non-recourse advance on his inheritance as a consumer loan subject to the requirements of TILA. As evident by both parties’ lack of citation to authority on this issue, the Court acknowledges the absence of case law addressing whether such a transaction is subject to TILA. However, the Court finds that the transaction between Plaintiff and AI was not a loan because Plaintiff had no obligation to pay AI anything if the Estate did not satisfy the amount Plaintiff assigned to AI.
Plaintiff “did not incur any debt or potential debt as a result of the transaction and it was not a loan or credit transaction governed by TILA, but ” an assignment of Plaintiff’s interest in his father’s Estate governed by the California Probate Code. Capella v. J.G. Wentworth, LLC, No. CV09-882, 2009 WL 3128003, at *10 (E.D. N.Y. Sept. 24, 2009) (distinguishing pay-day loans from structured settlements). In Capella, the plaintiff was seeking the protections of TILA for a transaction in which he, as the beneficiary of a structured settlement, received a lump-sum payment smaller than the overall amount that would be received over time. Id. at *1. In exchange, the defendant received the right to collect the larger sum over time through the structured settlement payments. Id. Like the plaintiff in Capella, Plaintiff assigned a larger portion of his interest in an inheritance to AI in exchange for a smaller cash payment now. TILA governs credit transactions, defined as “the right granted by a creditor to a debtor to defer payment of a debt or to incur a debt and defer its payment.” 15 U.S.C. § 1602(e). Plaintiff incurred no debt and AI had no recourse against Plaintiff if his potential inheritance was not sufficient to cover his assignment. Accordingly, Plaintiff’s TILA claim against AI cannot succeed because it was not a credit transaction subject to TILA’s requirements.
Plaintiff’s TILA claim against Val-Chris and Marion, based on the second transaction, is also precluded because TILA does not apply to transactions involving extensions of credit to organizations, including estates. TILA “does not apply to . . . credit transactions involving extensions of credit primarily for business, commercial, or agricultural purposes, . . . or to organizations. 15 U.S.C. § 1603(1) (emphasis added). An organization, to which TILA does not apply, is defined as “a corporation, government or governmental subdivision or agency, trust, estate, partnership, cooperative, or association.” § 1602(c) (emphasis added).
Given that a probate advance is legal, the next question is whether you should get a probate advance on your inheritance.