Depends. There are costs and benefits to a probate advance, as well as other options that may be available.
Why Does Probate Take So Long?
In most states, a regular probate administration can take months or years. (Most states have a streamlined process known as summary administration, or small estate administration. These procedures are normally limited to smaller estates. An inheritance probate advance would not normally be needed during a summary administration.)
There are four primary reasons why the probate process takes so long: creditors, taxes, illiquid assets, and disputes.
Each state has a time period during which creditors of the decedent are provided with a notice to creditors, during which time a creditor can file a claim against the estate. After a creditor claim is filed, the estate can agree to pay the claim, or can dispute the claim. The creditor and the estate can also compromise the claim.
If the creditor claim is disputed, the creditor and the estate will litigate the claim. The litigation process can take many months or years, depending on the complexity of the creditor claim.
State Creditor Claims Periods
30 days, 3 months, or 2 years (see The Complete Guide To Creditor Claims in Florida Probate)
7 months (see How To Make a Creditor Claim Against the Estate Of a Decedent In New York)
60 days or 4 months (see Creditor Claims in California Probate)
121 days, 4 months, or 6 months depending on the type of claim, administration, and notice (see Deadlines and Timelines In Texas Probate)
30 days or 6 months (see Creditor Claims In Ohio Probate)
Federal and state income taxes need to be resolved before an estate can be closed. It is not uncommon for someone near the end of life to stop filing and paying taxes. If that happened, the personal representative of the estate might need to prepare and file missing tax returns, which could take some time.
Normally, if late returns are filed where taxes are owed, the Internal Revenue Service will impose interest and penalties. The personal representative will need to wait and see exactly how much interest and penalties are assessed before resolving the tax issues.
If the Internal Revenue Service imposes penalties, the personal representative might want to ask the Internal Revenue Service to abate the penalties, which normally takes many months.
Some estates hold assets that are easy to liquidate – checking accounts, brokerage accounts, and life insurance, for example. Such estates should end quickly, in the absence of any other delaying factors.
If the estate holds real estate, the real estate might need to be sold, which would take as long as the sale of any other real estate. If the real estate is required to be distributed to a specific beneficiary, such might not cause excessive delays. If the real estate is to be distributed along with other assets through the residuary clause of the will, making an “in kind” distribution of the real estate might speed up the process. Of course, making an “in kind” distribution of the real estate might create its own delay-causing issues. For example, beneficiaries to receive an “in kind” distribution of real estate might not agree with the value of the real estate, in which case the “in kind” idea might backfire and result in a dispute, further delaying the estate.
A simple example will illustrate the point. Assume an estate holds $500,000 in cash, a property worth around $500,000, and the estate has two residuary beneficiaries, each entitled to one-half of the estate. The personal representative might propose giving one beneficiary the $500,000 in cash, and the other beneficiary the property. If the beneficiary to receive the property asserts that the property is only worth $400,000, the beneficiary will also want an additional $50,000 in cash to equalize the distribution of $450,000 each. If the issue cannot be resolved, court intervention will be required – meaning an evidentiary hearing. Most court systems are sufficiently backed up such that a hearing might not take place for many months. It would have been faster to have simply started the process of selling the property from the onset in many cases.
Another problem with distributing real estate arises if the real estate has a mortgage on it. The distribution might require negotiation between the bank, the estate, and the beneficiary who is to receive the real estate – meaning more delay. Many mortgages have a “due on death” clause, meaning that the mortgage is immediately due and payable upon the death of the owner. Although most banks do not immediately enforce such clauses, distributing real estate with such a provision in the mortgage could create new issues for the beneficiary receiving the real estate.
A common problem where the mortgage is not transferred over to the new beneficiary is that the bank will not talk to the owner because the new owner is not on the mortgage. The new owner will have to assume the mortgage or refinance the property – something that not every beneficiary will be able to do.
If the estate holds commercial real estate, the problems multiply. Owning commercial real estate is a business, with leases, security deposits, various forms of insurance, and usually lenders. Getting a handle on these issues such that a piece of commercial property can be distributed to a beneficiary would normally take several months. Selling such property might, in fact, be much faster.
The hardest assets to handle are active businesses. The personal representative will have to handle employees, customers, leases, and countless other obligations. This process can take many months, if not years, before the business can be distributed to the beneficiaries. One immediate question that the personal representative and beneficiaries should ask is whether the business can or should be saved for the benefit of the beneficiaries, or simply shut down. See our guide on How to Save a Business Owned By an Estate.
A dispute during administration of the estate can cause delays measured in years. Just about anything involving an estate can be disputed: the validity of the will, who should be appointed personal representative, creditor claims, valuation issues, maladministration by the personal representative, and many others.
Some issues, while not technically disputes, will require court intervention that will cause delays. These include missing beneficiaries, the need to appoint a guardian for any minor beneficiaries, and the interpretation of ambiguous phrases in a will.
What Factors Could Prevent a Probate Advance?
At least a dozen companies operate nationally in the probate advance business. Each company has its own criteria to determine whether a probate estate is suitable for an advance, and its own criteria to determine how much of an advance to give and on what terms. The following factors will normally prevent a probate inheritance advance:
Most inheritance lending companies will not give a probate advance if the estate is engaged in a dispute about the basic framework of the estate – whether the will is valid. Other types of disputes may or may not be problematic. A lawsuit involving a creditor claim against the estate might not be a barrier to an inheritance advance if the maximum amount of the creditor claim can be quantified and there are sufficient assets in the estate after subtraction of the maximum damage the creditor claim might make to the size of the estate.
Judgment Against the Beneficiary
If a beneficiary seeking a probate advance has outstanding recorded judgments against him or her, most probate advance companies will be reluctant to provide an advance, because of the unwillingness of the probate advance companies to end up in a dispute against a beneficiary’s judgment creditor. Of course, if the advance is going to be paid directly to the judgment creditor, such might resolve the issue.
Difficult to Value / Difficult to Liquidate Assets
Most probate advance companies will not make an advance based on assets that are difficult to value or will be difficult to liquidate. An estate consisting of mostly business interests will not normally be a candidate for an advance because the probate advance company does not want to be stuck owning a business or waiting for years for a business to be liquidated. If the estate holds such assets, in addition to “easy” assets such as cash or securities, such an estate might be an excellent candidate for a probate advance – at least on the value of the easy assets.
How Does the Probate Advance Process Work?
Each company provides advances in different ways. Some companies will make a loan to the beneficiary, with the beneficiary’s interest in the estate pledged to the company. Other companies will buy a portion of the yet-to-be-received inheritance from the beneficiary in exchange for a cash payment.
Each company will base its decision on how it values the estate. Each company will have a maximum amount that it will fund. For example, the company might lend against 20% of the value of the estate to be received.
Because the criteria used by each company will vary, it is a good idea to get quotes from more than one company. Indeed, some companies may not lend against a particular estate, while others might do so.
Most advance companies do business on a “non recourse” basis – meaning that if the advancing company does not receive what it thought it was going to receive, the beneficiary owes the advance company nothing. So the advancing company takes all of the risk associated with the transaction. This aspect of the business does explain why the companies can have strict criteria and why the lending amounts are normally well below 50% of the expected inheritance.
Alternatives to a Probate Advance
There are alternatives to a probate advance which will almost always be less expensive than working with an advance company. These alternatives will take longer than a probate advance in almost all situations, however.
In most states, the personal representative does not have to wait until administration is complete before making distributions. A distribution prior to the final distribution is known as an interim distribution. Whether an interim distribution is appropriate will depend on many of the same factors that a probate advance company would use – the absence of litigation, the absence of disputes, having a handle on creditor claims and taxes, and having a clear plan on how to turn the assets of the estate into cash.
An interim distribution does create risk for the personal representative. For example, if an interim distribution was made and it ends up that there are not sufficient assets to pay all creditors, the personal representative could face personal liability to the creditors.
An estate is able to borrow from a bank like any other person. A loan could be taken and used to fund interim distributions. One problem, however, is that most loans require a personal guarantee. A personal representative might not be willing to provide such a personal guarantee. It is possible a bank would allow the beneficiaries to make the personal guarantee, but the complexity and length of the transaction would increase.
In Kind Distributions
If an estate has illiquid assets that will cause extensive delay in closing the estate, the personal representative and beneficiaries could agree on a plan if distribution to distribute out all of the assets to the beneficiaries prior to their sale. Forcing such a plan on beneficiaries who do not agree will ultimately cause new and lengthy delays, and new litigation expenses. Therefore, the in kind distribution plan should be used when there is consensus on how to proceed.
What Are the Disadvantages of a Probate Advance?
The primary disadvantage of an inheritance advance is that you will likely receive less money than had you waited. Companies making probate advances do so in the hope of earning a profit. The only way in which they can do so is if they advance less money than they will ultimately receive.
Whether or not a probate advance is an option for you depends on the facts of the particular probate you are involved in, and whether or not your anticipated inheritance is sufficient and certain enough to justify a probate advance company extending you an advance on your inheritance.
Finally, probate advances are legal in all 50 states. Of note, California and New York regulate probate advances.