Probate

Inheritance is a complex process. In most cases, willed property must go through a series of checks to ensure everything is passed on legally and correctly. If an estate is large enough, or meets certain conditions, it may need to go through a lengthy process known as probate in order to be passed on to heirs. Read to learn all about probate, how this process works, and what’s involved.

What Is Probate?

Probate is a legal process through which a person’s estate is passed on to their heirs after they die. This multi-step process validates a person’s will, pays off any remaining debts, and grants the executor of their will the legal right to disperse their assets.

Probate is often required if the deceased:

Personally owns bank accounts, investments, or real estate
Has a high-value estate
Doesn’t have a valid will

How Does Probate Relate to Hard Money Loans?

Probate can be an involved process, tying up the deceased’s assets and valuable real estate for over a year. In the case that beneficiaries need immediate access to funds, many hard money lenders offer probate loans, a type of loan that uses future inheritance as collateral. Thanks to these loans, beneficiaries can access inheritance funds before probate ends.

Depending on the hard money lender, beneficiaries may be able to borrow up to 75% of their inheritance via probate loans. Once probate is finalized and the estate is dispersed, the borrower can then pay off their loan using their inheritance.

How Probate Works

So, what exactly occurs during probate and why can the process take so long? Let’s break it down step by step.

The Probate Process: Step-by-Step

When a deceased person’s assets go into probate, it must go through the following process:

Step 1: File the will

First, either the will’s executor files the will and death certificate with the probate court. If there is no will, a court-appointed administrator files a petition to manage the estate.

Step 2: Validate the will

In some cases, a hard money lender may refer to your home equity as a percentage. They’ll use this formula to calculate it:

Equity (%) = (Monetary home equity / Outstanding loan balance) x 100

In the above scenario, equity is calculated as follows:

Equity (%) = ($200,000 / $400,000) x 100

In this example, you have 50% home equity.

Step 3: Evaluate assets

Once the executor or administrator receives approval from the court, they catalog and value the deceased’s assets, including any bank accounts, real estate, investments, and more.

Step 4: Settle debts

The executor or administrator then uses the funds from the estate to settle any outstanding debts and pay taxes. This process can take many months to over a year to complete.

Step 5: Disperse inheritance

Finally, the remaining assets are dispersed to beneficiaries according to the will.

Real‑World Scenarios

Probate loans can be an advantageous solution in many different scenarios.

Investment Opportunity

A beneficiary is slated to inherit a $1 million that’s currently stuck in probate. A dream investment opportunity in a $500,000 property arises and the investor doesn’t want to miss out. They approach a hard money lender and take out a probate loan of $400,000 which they use alongside $100,000 of their own money to purchase the new property.

Six months later, probate finally settles. They inherit the $1 million and pay back their probate loan.

Personal Funds

A person is $100,000 in credit card debt. It’s been a particularly hard year and they don’t have the liquid funds to pay this debt, but they are expected to inherit a $500,000 property from a deceased relative. The property is currently stuck in probate and their debt is on the verge of being sent to collections.

Rather than waiting for their inheritance and dealing with collections, they approach a hard money lender and take out a $100,000 probate loan. They use these funds to pay off their credit card debt. A year later, their inheritance is settled and they use a portion of it to pay off their probate loan.

Probate FAQs

Why do banks require probate?

Probate acts as a safety check for banks. They use it to ensure that a will is valid and that the will’s executor is authorized to execute the will. In the event that there is no will, banks use probate to appoint a person to execute the will, known as an administrator.

Is probate always necessary?

No. A bank can use its discretion when it comes to probate. If the estate is small, the bank may not require probate. On the other hand, if the estate contains real estate, investments, or other high-value assets, probate is almost always required.

Can a property be sold while it is in probate?

Yes, a property can be sold while it is in probate, but it may require court approval. The will’s executor must also inform all heirs of the sale. Additional legal requirements may apply.

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