If you’re an heir to an estate, you may have found yourself on the receiving end of marketing messages and sales calls offering probate loans, a probate advance, or inheritance advances.
They all promise a near-immediate or same-day cash distribution on a portion of your inheritance money rather than waiting for probate to be cleared and the full proceeds to be distributed.
You have a few different options if you need to access your inheritance proceeds prior to the closing of probate. These services might go by various names. Some common terms you’re likely to see:
- Probate Advance
- Inheritance Advance
- Probate or Inheritance Loan
- Estate Advance
- Heir Advance
These cash advances are often difficult to understand, due to a lack of regulation and unfamiliarity with the industry, so we created this unbiased article to help you understand what probate advances are and if they’re a good idea.
What Is A Probate Advance?
A probate advance, or inheritance advance, is a cash advance solution that offers immediate payment of less than your full inheritance for the right to receive the full amount when probate closes.
It’s an alternative method to accessing a portion of your assigned estate proceeds. The main benefit of this product is that you can get your proceeds quickly rather than waiting the six to twelve months it can take to close probate.
Here’s how it works: you submit an application with information about the estate, the lender evaluates the estate and how much you stand to inherit. If the lender believes it’s likely to make money on an agreement with you, they will offer you a portion of your assigned proceeds in exchange for the full amount as the end of probate.
Your experience will vary by company, but there is often no need to show personal income and the advance isn’t collateralized against any of the assets — as is common with a loan. Credit score often isn’t a factor, either.
A probate advance is similar to any type of cash advance product in the market. They offer a convenient way to fast cash, but often come at a high cost. There are often cheaper alternatives to cash.
This doesn’t mean they don’t make sense. In some cases, it’s a reasonable solution for people, despite the cost.
Probate Advance Versus Probate Loan
You will find an alternative product, called a probate loan. A true probate loan solution will typically use assets in the estate as collateral — mostly real estate.
A probate loan works like most loans you’re familiar with. You will fill out an application, it can be based on your credit score or monthly income, and you will make monthly installment payments with interest payments until the estate closes.
Sometimes you will see probate advances marketed as probate loans. The probate advance isn’t secured against the real estate.
Probate advances are more of an assignment to your inheritance rather than a loan.
It’s important to understand which product you are getting and determine which, if any, option best suits your needs.
A true probate loan is often more economical than assigning a portion of your inheritance to a probate cash advance company.
However, depending on how long a probate case lasts, interest can really add up and a probate loan can become quite expensive.
An inheritance advance doesn’t have the same high lending standards as a probate loan does. There are no monthly payments and no interest charges. The funds are received quickly rather than having to go through a lengthy underwriting process.
How Much Does an Inheritance Advance Cost?
Exact costs of an inheritance advance varies based on the company you’re dealing with.
The probate advance industry is relatively new and in its infancy. There are few regulations, unlike other financial products, such as credit cards, mortgages, and car loans.
Costs will vary from one company to another.
There are two types of expenses when it comes to the cost of a probate advance: upfront fees and phantom costs.
It’s common for there to be no upfront fees or charges on a probate advance. In contrast to a loan product, like a mortgage, you won’t pay origination points or lender fees.
Every company doesn’t offer this convenience, though. Some will charge various fees, like an application fee.
Phantom costs are expenses that you end up paying, but don’t see.
Probate advances have a very real cost. The cost is selling your probate proceeds at a discount of market value.
Example: Sally is set to inherit $75,000 from probate after the death of her parents. She wishes to get a probate advance. The company doesn’t require her to pay any upfront costs. The company will advance her 30 percent of the projected distribution amount. The probate advance company gives Sally $22,500.
These figures aren’t theoretical and an example calculation was pulled from a popular company that offers inheritance advances.
Probate Advances Can Be Expensive
As we’ve seen in the example above, probate advances can be very expensive. In a study done and a report published by Consumer Reports, beneficiaries and heirs gave up, on average, nearly half of what they otherwise would have inherited.
The report turns the cost of a probate advance into an annual percentage rate (APR). They do this to compare a probate advance to other loan products, like a mortgage or credit card.
In their analysis, they found that one in four of the closed transactions hit triple digits, or above 100% annual percentage rate. Compare that to a credit card at 20 percent or a mortgage at 3.50 percent.
Their average APR calculated in the report was 86.9 percent. The study consisted of 168 transactions analyzed over seven states.
Keep in mind some of the errors or false conclusions with this study. First, 168 transactions over seven states is a small sample size. It’s a poor representation of probate advances across the nation.
Meaning, the report shouldn’t be used to conclude the type of annual percentage rate you would pay. Therefore, don’t assume the costs of your probate advance will be as high as those in the study.
Second, there was no analysis or information published about the standard deviation or the variance of the sample set.
A sample set with a large variance means that each transaction varied widely in its annual percentage rate. Meaning, a given probate advance is less likely to be near the average annual percentage published by Consumer Reports than if the sample set had a smaller variance.
The point: don’t place stock into the average number. Don’t use it as a guide. Instead, estimate your own annual percentage yield and compare it to other loan or funding options.
Estimate the Annual Percentage Rate Probate Advance
The government saw a real issue with the way loan products were marketed, sold, and communicated to consumers. There was too much ambiguity and predatory lending practices.
So, the government created the Truth in Lending Act, which requires lenders to disclose all costs in a comparable format so consumers can make informed choices. That comparable format is the annual percentage yield, or APR.
An APR gives us the true cost of a loan. With the APR, we can compare probate advances from one company to another. We can also compare probate advance products to alternative loan options.
To do this, you will need a few numbers. You need to know the amount you will receive from the inheritance advance company (A), the inheritance amount you are assigning to the probate advance company (B), and the estimated number of days between when you receive the money and when you believe the probate will close (C)
You can now calculate an effective annual percentage rate. The formula is as follows:
[(B-A)/A] x (365/C) x 100
Example: Let’s go back to our example of Sally, who assigned her $75,000 inheritance (B) to a probate advance company in exchange for $22,500 (A). Assume her probate case is expected to take 180 days to close from the day she receives payment.
Her formula is:
[(75,000 – 22,500)/22,500] x (365/180) x 100
Solving: we get 473% annual percentage yield.
Wow! That’s quite expensive from a financial perspective. Compare that to our alternative loan options which might charge anywhere from 3 to twenty-five percent, for example.
But, if you look closely at the formula, there are a few insights. We can see which variables need to move in which direction if we wanted to lower our overall annual percentage rate on a probate advance.
How To Lower Your APR Probate Advance
It’s math. To lower your annual percentage rate, or overall costs, of a probate advance, you will need to manipulate two variables.
First, you need to receive as close to a full percentage of your inheritance proceeds. For example, if you’re set to receive $75,000, then you want to increase the amount that the probate advance company pays you.
In our example with Sally, it was $22,500. If we can increase that payout amount, then we can lower our overall APR and get more money, too. In our APR formula, this is the “A” variable. It should be as large as possible.
You can do this by shopping around with the various probate advance companies. It pays, literally, to do the right amount of research.
Second, the length between when you receive your cash advance and the time it takes for probate to close — the “C” variable — will have an effect on the APR.
The longer the time period, the lower the APR. The shorter, the higher the APR will be.
Take Sally: her APR was 473% at 180 days. If, however, it took 365 days, her APR is lowered to 236.5%.
While we can’t manipulate or play with the time it takes for a probate case to close, it does give us some insights into the situations where a probate advance may make sense.
The formula indicates that a probate advance is a possible good option if you anticipate the probate case to take a long time to close. For example, sibling disputes and estates with real estate in them may make prime candidates. These situations may cause probate to be longer than average.
Are Probate Advances A Good Idea?
Maybe. It depends. I know, typical crappy internet advice from a blog. But, the question is a bad one. Instead, you need to ask if a probate advance is a good idea for YOU.
Probate advances or inheritance advances aren’t good or bad by themselves. They have their benefits and disadvantages — just like any other product or service.
We explored the downside of probate advances — their costs — but that doesn’t make them an unreasonable choice for some people. For some, it makes sense.
For example, a probate advance can be a reasonable option for those with an emergency financial need. Or perhaps, you want the money sooner to pay off high-interest credit cards.
Let’s look at the financial outcome of taking a probate advance to pay a credit card off.
Assume there is a $15,000 balance on a credit card with an interest rate of 20 percent. For simple purposes, we will calculate the yearly interest at $3,000, or 20%, rather than assuming monthly payments.
You get a probate advance of $15,000 and pay off that credit card, saving you $3,000 per year. If you waited, you would have had $30,000 one year later. You pay off the credit card ($18,000 balance), leaving you with $12,000 net.
From a financial perspective, it would have been better to wait, but there is an emotional toll debt has. A probate advance could be an option to clear yourself of debt and sleep better at night.
Does The Estate Include Real Estate?
Estates with assets, like real estate, are more likely to drag on than simple estates. This is due to the sometimes lengthy process of selling a piece of probate property.
In a good real estate market, where homes are selling fast, it’s not as much of a concern. But, take a balanced market, for example.
A balanced market is typically defined as 6 month absorption rate, or the time it would take to sell all of the existing homes given the current sales rate. In this kind of market, the days on the market for a listing are nearly 180 days.
Looking at the laws of supply and demand, probate homes tend to take longer than the average. This is due to the condition of the home. It’s typically outdated.
Imagine you are the heir to an estate in probate where a home needs to sell. Selling a probate property could take you roughly 9 to 12 months.
That’s just for real estate. It doesn’t take into account all of the other functions that are required to close an estate in probate.
If the estate has real estate, it’s a good idea to get information from a probate real estate agent, like how long it will take to sell the property.
Sell Probate Property As-Is
The time it takes to close an estate that contains real estate will be dependent on selling the probate property. In other words, the faster the home sells, the faster the estate closes, and the sooner you get your proceeds.
Working with a real estate company, like the Dolinski Group, we’re familiar with the probate court, its process, and common speed bumps. We know how to complete a fast probate sale in Michigan.
While there are no ways of getting around the legally mandated steps and requirements, we can move faster and closer sooner than your average company.
First, we can help you sell the house in a traditional way. This will take time, but allows you to maximize the value of the estate.
However, if you’re considering a cash advance, consider getting all parties to agree to sell the home for cash instead. At the Dolinski Group, we make cash offers to qualifying home owners in our service areas. Sell your probate property quickly.
Why sell the home to us? Many of the same reasons as a cash advance. It shortens the process of probate. Plus, you will often walk away with more of your probate proceeds than if you worked with a probate advance company.
Example: Sally is set to inherit $75,000 and the probate advance will give her $22,500. Let’s assume her $75,000 inheritance is composed of $60,000 interest in real estate and $15,000 cash. Her siblings agree to sell the home for cash and she receives $25,000 of the $60,000 interest in property. She still receives her $15,000 in cash, too, bringing her total to $40,000.
Granted, this option will still take time. It isn’t same day funding, but it’s an alternative option. It’s a middle ground between waiting for probate to close and getting same day cash advance.
Make An Informed Decision
What’s most important is that you make an informed decision and evaluate your circumstances. Don’t make the decision lightly and try to push past the emotions of the decision.
It’s common for people to find a probate advance company because they have a pressing financial emergency or need for funds today and feel they can’t afford to wait.
Try to slow down and take the time to decide if it’s right for you. Seek out multiple offers and consider alternatives.
Can you get a personal loan from your family if you need money? Can you sell the house for cash and close probate sooner? There are a dozen different options out there.
They can be tough to navigate but it’s worth exploring.
What Other People Say Good and Bad
To give you an idea about how people feel about probate advances, I pulled from reviews — both good and bad — from Google for some of the popular inheritance funding companies.
I believe each review is based on how informed a person was, what they were expecting. People seem disgruntled by the high cost and happy with the speed of funding. These are definitely the main pros and cons of probate advance.
Expect to get fast funding, but expect it to be at a high cost. Evaluate your personal situation if this is worth it for you. Otherwise, look for alternative options if you need money.
How To Find A Probate Advance Company?
If you think that a probate advance might be right for you, lenders are relatively easy to find. Perform an internet search for “probate advance” or “inheritance advance”. Typically you can find national companies or you can also look for state level companies.
As discussed above, contact several lenders, compare their offers, and seriously consider getting advice from an attorney who is familiar with probate lending.
You may find probate lenders will contact you. Probate cases are public records, so lending companies can get your contact information and if they believe you are eligible for their financial service offerings, they will reach out to see if you’re interested.
Here are some of the top players:
Disclaimer: In no way do we recommend or verify the quality of these companies. We simply performed a Google search and listed them on our website for your convenience. You’re responsible for properly researching and vetting each of these companies.
How Long Does Probate Take?
The time it takes to close probate will vary based on the estate. For simple estates, a case can be closed in a matter of months. Typically, 6 to 9 months.
The length of time can greatly increase when real property or other hard-to-value and sell assets are involved. An estate that includes an inherited home can take a long time to sell and will become dependent on how the real estate market is performing.
If you had to sell a property in probate during the Great Recession, it would have taken a long time to sell the property, and therefore, close the estate.
Each state has their own laws for probate, so you need to reach out to an experienced probate attorney. They can help you get a better idea of the time it takes to close probate.
Recommendation
TL;DR – Too Long; Didn’t Read.
Probate advance companies will give you an instant cash amount percentage based on the amount you are set to inherit from an estate once probate closes.
The cash advance comes at a steep cost. A triple digit annual percentage rate is common. You will typically see only 30 to 60% of the value you’re set to inherit. You will take a significant “loss on value” on your inheritance for cash today.
However, this may be worth it. Your circumstances will depend on whether this is a reasonable choice.
Understand there are alternatives and do a thorough research on those options. Make an informed decision that you believe is the best for you.
These advances aren’t for everyone, but they can be a reasonable option depending on your situation.
If your estate includes real estate in Michigan, get in touch with us. We specialize in helping heirs sell probate property in Michigan. We service a wide region of Michigan or we can connect you with some of our referral partners in other parts of Michigan.
Get started today and learn how we can help you.
