By Russell Barneson
By Russell Barneson
Inheritance loans (aka, estate loans, probate loans or trust loans), are commonly used when one heir of an estate wants to keep the family home after a loved one has died.
Often times, an individual will not have the necessary funds on hand to buy out the other heirs.
Since none of the heirs are on the title of the inherited property, traditional lending sources such as big banks and credit unions won't provide funding.
Bridge lenders are commonly used in this situation to assist the heir with buying out the remaining beneficiaries.
Let's go through a hypothetical example of how the probate process plays out.
Jack, Kevin and Amy unfortunately recently lost their windowed mother.
She had an estate valued at $3 million dollars. The family home is located in Los Angeles, California and valued at $1.5 million dollars.
The parents purchased the home in 1974 for $150,000 dollars and when the widowed mother died she owned it free and clear.
The remaining $1.5 million dollars of the estate was made up of stocks, bonds and artwork.
Their Mother's Will specifies each sibling should receive an equal portion of the assets.
If all assets were liquidated, this would equate to a distribution of $1 million dollars for each sibling.
Amy lives in Los Angeles, California and has fond memories of the family home.
She wants to keep the property while her 2 brothers want to sell it and receive a cash payout.
However, Amy doesn't have enough liquid cash to buy her brothers outright, and can't secure financing from a traditional bank because the title of the home is not in her name or any of her brothers.
The siblings agree the 2 brothers will take possession of all the stocks, bonds and artwork which equates to $750,000 dollars for each brother.
To make the brothers whole, Amy will need to pay them $250,000 dollars each.
After searching online, Amy realizes her best bet is to buy out her brothers through the use of an inheritance loan.
She finds a hard money lender, who has the property appraised at $1.5 million dollars.
This bridge lender loans her the $500,000 dollars at an interest only rate of 9.00% for 18 months to make her brothers whole.
The loan to value ratio is 33% (a $1.5 million dollar collateral asset divided by a $500,000 dollar loan).
This 33% known as the loan to value ratio (or LTV) is very conservative in the private money lending industry.
Amy's exit strategy from this bridge loan is to secure more traditional financing once the title of the property is in her name.
Hard money lenders are commonly used to provide funding for inheritance loans (aka, estate loans, probate loans or trust loans), when big banks are not an option.
In this case, hard money loans act similarly to home equity lines of credit, otherwise known as a HELOC, as the equity in the inherited property is used to buy out the other heirs.
These trust or inheritance real estate loans, provided by bridge lenders, do not contain as stringent requirements as a traditional bank loan and primarily focus on the value of the underlying asset.
Many lenders are willing to go up to 70% or 80% loan to value ratio.
Since the 1970's, property prices in California have dramatically increased in value.
Amy was able to inherit her parents original property tax rate on the family home which equates to an annual cost of $1,155 dollars.
If Amy were to buy a home today of equal value to the one she has inherited ($1.5 million dollars), without inheriting her parents' property tax she would be responsible for $11,550 in property taxes.
Additionally if Amy decides to sell this inherited property in the future she will benefit from a step-up tax basis.
Since Amy's mother passed away in 2020 and Amy took possession of the home and was placed on the title of the property deed, her cost basis for the property is $1.5 million dollars.
Amy decides to sell the home 10 years later in 2030, for a price of $2 million dollars.
Since she inherited the property with the step-up tax basis, her long term taxable capital gains are $500,000 dollars.
If she were taxed without the step-up tax basis she would have paid taxes on a gain of $1.85 million dollars because her parents purchased the property for $150,000 dollars in 1974.
As you can see there are tremendous benefits to using inheritance loans.
Initially, a hard money loan gave Amy the ability to keep the home in the family for sentimental reasons.
While she owned the home she was able to take advantage of the inherited property tax rate from 1974.
When she eventually sold the property she was able to take advantage of the step-up tax basis resulting in her paying drastically less in capital gains taxes.
Crescent Lenders' realizes the passing of a loved one is a difficult event. It's important to deal with a professional and reliable company. We are always here to take your call or if you have any questions send us an email.
Disclaimer: Crescent Lenders, DBA CrescentLenders.com ("CL") is a California licensed broker under California Bureau of Real Estate License No. #01792267. Regardless of this license, CL considers itself a “finder” for purposes of applicable laws and regulations (California Business & Professions Code § 10130, et. seq.).