New Virginia Law Regulates Probate Lending

The Virginia governor recently signed HB 648 into law, which increases regulations to probate lenders and designates cash inheritance advances as loans subject to capped interest rates. Introduced by Delegate Carrie Coyner, the bill aims to prevent predatory lending and excess interest rates on inheritance advances by imposing licensing requirements for probate lenders. This bill will impact all Virginia estates opened after July 1st, 2024 and caps the interest rate to 12% on any cash advance for probate.

An inheritance advance can be a useful tool for some families, as it gives instant access to funds that could be restricted during probate proceedings. However, with high interest rates and potential estate complications, these types of agreements may not be best for everyone. In this article, we examine the impacts of probate lending on the estate administration process and probate bonds.

What is a Probate Inheritance Advance?

Probate is the legal process of administering an estate through the courts, paying off any debts and distributing inheritances to the heirs. A probate case can be a timely process that can take 12-24 months to complete. If an heir to an estate needs their inheritance before probate is complete, they can agree to a probate inheritance advance as a way to get cash quickly.

Probate inheritance advances, also known as probate loans or inheritance funding, are cash advances on an inheritance provided by a third-party company. Estate beneficiaries agree to receive a portion of their inheritance early with a lump sum payment and the third-party lender is entitled to that beneficiary’s inheritance with interest once probate is complete. Many individuals choose to wait for the full inheritance, but probate advances can be useful for people who need large sums of cash quickly.

For example, let’s say an heir is expecting to receive $50,000 in cash from his grandfather’s estate, and he receives a letter offering $40,000 in a lump sum payment from a probate inheritance advance company. He can choose to receive $40,000 now by forfeiting his $50,000 inheritance to the company upon the estate’s closure. There are benefits and drawbacks to using an inheritance advance like the example above, which we explain below.

Benefits of Probate Inheritance Advances

1. Immediate Access to Funds: One of the primary advantages of a probate inheritance advance is immediate access to funds. Probate can be a lengthy process, often taking months or even years to settle. Heirs who need money for immediate expenses—such as paying off debts, covering medical bills, or managing day-to-day costs—can benefit greatly from receiving their inheritance early.
   
2. No Monthly Payments: Unlike traditional loans, probate advances do not require monthly payments. Once the probate process concludes, the advance is repaid directly from the inheritance. This can provide financial relief without the added pressure of regular loan repayments.
   
3. No Credit Check: Probate inheritance advances typically do not involve credit checks. The amount of the advance is based on the anticipated inheritance rather than the heir's creditworthiness. This can be particularly beneficial for individuals with poor credit or those who may not qualify for traditional loans.
   
4. Fixed Repayment Amount: The amount to be repaid is agreed upon at the outset and does not accrue interest. This fixed repayment amount provides clarity and ensures that heirs know exactly how much will be deducted from their inheritance.

Disadvantages of Probate Inheritance Advances

1. High Costs: One of the significant downsides of probate inheritance advances is their cost. The fee for receiving an advance can be a significant percentage of the inheritance. This cost can reduce the overall amount received by the heir once the estate is settled.
   
2. Reduced Inheritance: Since the advance is repaid from the inheritance, the heir ultimately receives less than they would if they waited for the probate process to conclude. This reduction can be substantial, depending on the terms of the advance.
   
3. Cash Advance Exceeding Inheritance: If the final estate settlement results in a smaller inheritance than anticipated, the heir may owe more than the advance they received. This situation can create financial complications and stress for the heir and can potentially lead to a probate bond claim.
   
4. Impact on Estate Distribution: Taking out an advance can complicate the distribution of the estate. It can affect the executor's ability to manage the estate and ensure that all debts, taxes, and other obligations are paid. Additionally, other heirs may feel disadvantaged or upset by one heir receiving an advance, potentially leading to family conflicts.

How Cash Advances Impact an Estate Proceeding

Probate inheritance advances can play a major role in an estate proceeding. The immediate effect is that it creates a financial obligation that must be settled before any remaining inheritance is distributed. This can complicate the estate administration, as the personal representative must ensure that there are sufficient funds to cover the advance repayment along with other estate liabilities. However, probate inheritance advances can have a positive impact on the estate by giving heirs early access to funds in delayed probate proceedings.

Inheritance Advances and Probate Bonds

From a surety’s perspective, taking out an inheritance advance increases the risk of a probate bond by adding an additional interested party. Probate bonds provide a financial guarantee to all interested parties in the estate by ensuring that the administrator or executor will fulfill their fiduciary duty faithfully. Probate advance companies take ownership of an heir’s portion of the estate and the fiduciary must ensure there are enough estate funds to cover the owed amount. If an administrator or executor fails to maintain enough estate funds to pay the probate advance company, they can file a probate bond claim to be reimbursed for any losses. If you have questions on how an inheritance advance can impact qualifying for a probate bond, please call our probate underwriters at (855) 470-0877 or email our team at [email protected].