When we have a loved one going through the last weeks and months of their lives, we often go through a difficult emotional and psychological time. In some cases, those difficulties are compounded after our loved one actually passes away. We often find that paperwork involving assets and liabilities is difficult to untangle – and that there were hidden debts that have just now come to light. Heirs may disagree with one another about whether the will distributes assets in an equitable manner, and the loss of a beloved relative devolves into bickering over money. Even the thought of taking out a Canadian inheritance advance may lead to protracted arguments.
Even in an amicable situation among heirs, settling the estate can take up to a year – if not longer, depending on the docket backlog where the deceased person lived and the complexity of valuing assets and tracking down all of the creditors.
In the meantime, the heirs may need access to funding sooner than the probate process will allow. A Canadian funeral can run well into five figures, especially if you also want to purchase a cemetery plot, for example. Private lenders do offer probate loans, but if heirs don’t have good credit scores, those can be difficult to obtain at reasonable interest rates.
One product that has increased in popularity is the inheritance advance. This isn’t a loan at all – instead, it involves a sale of part of an heir’s interest in the estate. For example, a heir might stand to receive $80,000 after the reading of the will. They could get an advance on part of it – let’s say $40,000. They would receive less than that as an advance because of the convenience of the immediate funding and the risk that the will might undergo changes through probate litigation. There’s no interest as part of this as it is not a loan. But what are the true costs of an inheritance advance?
Wait – what are the differences between a loan and an advance?
A loan requires repayment, almost always with interest. An advance is a partial prepayment based on an anticipated later influx of funds. For example, when a publisher buys the right to an author’s novel, the publisher pays an advance on the royalties the author is likely to receive off the proceeds off the book. If the advance is, say, $100,000, that indicates the publisher believes that the author’s work will sell quite well. Sometimes this is based on the author’s prior sales for previous works; at other times, it is based on the publisher’s familiarity with the market and enthusiasm for the work they are about to sell.
With an inheritance advance, you’re giving away some of your anticipated future inheritance in exchange for the convenience of getting the money right away, instead of waiting for the months that the probate process can take to finalize.
So how does the fee structure work?
You’ will read that inheritance advances are “zero interest” because that sounds a lot cheaper than the potentially high interest rates that private lenders can charge for probate loans. However, the fee itself can run between 10 and 50 per cent, so the convenience can come with a hefty fee.
So let’s go back to that earlier example. You’re likely to receive $80,000 from an estate. The inheritance advance provider offers you $30,000 up front – but wants a $30,000 fee out of the eventual proceeds. So you’ll end up getting a total of $50,000 — $30,000 now and $20,000 net after the advance provider takes their fee. That means you’ll get about 63 per cent of what you would have received – so you are paying a 37 per cent fee.
How does this compare with the costs of a probate loan?
Let’s go with a fairly average probate settlement time frame and assume that the process will take nine months between the time your loved one passes and the time the probate settlement is finished and you receive your share. That 37 per cent fee has an effective interest rate pushing 100 per cent. Probate loans can charge interest between 7 and 15 per cent in most cases. So while the idea of a simple, one-time fee might sound less costly, the reality is often quite different.
So why would anyone take out an inheritance advance?
The convenience is the real draw with this type of financial product. You can receive your funds as quickly as 24 to 48 hours after approval. The due diligence process only involves the estate itself – not your personal financial situation. Heirs who have credit in shambles, prior bankruptcy or no other income will have a difficult time qualifying for a probate loan, even if the estate is quite large, because they will struggle to prove that they can make monthly payments while the probate payment plays out.
With an inheritance advance, all customers have to do is provide documents like the death certificate, probate petition, administration letters from the court, a copy of the will, and valid identification.
Depending on your situation, a probate loan might make more sense – but an inheritance advance could also take care of some very real financial needs that you have today. If you have other collateral, there are other borrowing options that could make even more sense. At Amansad Financial, we have financial professionals who have worked with borrowers in just about every conceivable situation. Before you sign up for an inheritance advance with a confiscatory fee, take the time to reach out to one of our professionals. We will listen to your individual situation and help you make the best decision for yourself and your family. Give us a call today!