Inheritance Advances in Canada: Is It a Loan or a Sale?
Just about every time we lose someone close to us, we go through a period of emotional stress. However, the relationship that we have to that person can mean that we go through financial stress as well. If we lose a spouse, even if there is life insurance in place, that can mean suddenly having to replace an entire income. If we lose a parent, that can lead to surprises in the form of hidden debts and sudden funeral costs. While many of these costs seem to spring up overnight, the funds that we might expect to cover them may not arrive for months because of the probate process. In some cases, inheritance advances in Canada can help families get the funding they need while the probate process unfolds. However, some confusion has arisen about just what an inheritance advance is – is it a loan, or is it a sale? Read on to learn more.
Why does probate take so long?
If you do a quick Internet search, the AI-generated results might tell you that probate takes between six and eight weeks. However, that is misleading: that is how long it takes, in most cases, just to get the executor approved and the official process underway. In fact, it can take several months just for this first step to occur, if you live in a large city with a backed-up docket. In places like Toronto, the backlog is such that it has taken three or four months in some cases just to get this first administrative step out of the way.
After that, the average probate process in Canada can range between six months and a year. There are several factors that can delay the settlement of an estate, including:
- Claims by creditors. After the estate publishes notice to all of the listed creditors, those creditors have a time period to submit claims for payment. Before asset distribution can occur, those claims have to be settled in full
- Asset complexities. If an estate contains business interests, share portfolios or real estate, liquidation can take time – which means delays in final settlement and distribution of proceeds to heirs. In some cases, executors may have to take out specialized financing to pay for inheritance taxes in cases of asset-heavy but cash-poor estates.
- Gaps in documentation. While the death certificate should be relatively easy to find, financial statements and titles can take time to find. Delays there can lead to significant setbacks in reaching settlement.
- Disputes surrounding the will itself. Interested parties have the right to raise objections about the validity of the will. In that case, the process can grind to a halt for months or perhaps even years. Also, disputes over how to liquidate assets, such as what price to accept for the sale of the family home, can also lead to delays.
How does an inheritance advance work?
An advance is just what it sounds like – an infusion of cash in expectation of a larger amount at a later time. You’ve heard of payday advances – small loans that people can take out if they have cash needs before their next paycheck from their employer. The advance comes at a fairly hefty fee, in terms of effective interest rate, and the borrower agrees to allow automatic repayment on the same day as his or her next paycheck.
With an inheritance advance, the lender does not know the exact date of repayment because, unlike pay periods, probate processes do not have set deadlines. This means that inheritance advance providers can ask for a higher effective interest rate – but since is not a loan (which means it does not come with any interest), this means that the fee will represent a more significant chunk of the eventual proceeds from the estate.
Inheritance advances are essentially sales of anticipated income from an estate. Let’s say you appear in a will with a bequest of $200,000. That’s a nice inheritance – but it may be as long as a year before you see any of it. In the meantime, you are going through a divorce, and one of your children just got accepted to a prestigious medical school in the United States. That means a lot of financial stress – and you have to set up your own household on a single income. You are already up to the hilt in credit card debt, so that debt-to-income ratio is not going to look good for a probate loan provider. This might be the perfect situation for an inheritance advance.
The convenience of an inheritance advance comes at a price, though. Once a finance company looks over the details of the estate, they might come back offering you $75,000 up front for a fee of $80,000 once you receive your check. That means that you will only get $120,000 of the $200,000 you were expecting – so you are essentially selling 40 per cent of your eventual inheritance for the convenience of getting that $75,000 is a fee that is $5,000 more.
For some heirs, that immediate infusion of cash is worth the comparatively high fee. There is also a variety of fees out there, so you will definitely want to get multiple offers – or work with a broker to find the best situation. At Amansad Financial, we have had the privilege of helping people in just about every imaginable borrowing scenario. We take the time to listen to and go through each client’s individual situation so we can make the best possible suggestions. Every situation is unique an d has its own factors. If you are wondering how to navigate the months between the loss of a loved one and probate settlement, get in touch with one of our lending professionals and start the process of finding the right way forward.