Funded
Not a broker
Rating on Google
What Is an Inheritance Loan?
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.
Oftentimes, 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.
Inheritance Loan Example
Jack, Kevin, and Amy, unfortunately, recently lost their widowed mother.
She had an estate valued at $3 million. The family home is located in Los Angeles, California, and valued at $1.5 million.
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 of the estate was made up of stocks, bonds, and artwork.
Their Mother's Will specifies that each sibling should receive an equal portion of the assets.
If all assets were liquidated, this would equate to a distribution of $1 million for each sibling.
Amy Wants to Keep the Family Home
Amy lives in Los Angeles, California, and has fond memories of the family home.
She wants to keep the property, while her two 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.
Amy Discovers Inheritance Loans
The siblings agree that the two brothers will take possession of all the stocks, bonds, and artwork, which equate to $750,000 for each brother.
To make the brothers whole, Amy will need to pay them $250,000 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 private money lender in California, who has the property appraised at $1.5 million.
The lender loans her $500,000 at an interest-only rate of 9.00% for 18 months to make her brother whole.
The loan-to-value ratio is 33% (a 1.5 million collateral asset divided by a 500,000 dollar loan).
The 33% loan-to-value ratio in this case would be considered 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.
Additional Benefits of an Inheritance Loan
Since the 1970s, 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.
If Amy were to buy a home today of equal value to the one she has inherited ($1.5 million), 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.
In 2030, Amy Decides to Sell The House
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.
Amy decides to sell the home 10 years later in 2030, for a price of $2 million.
Since she inherited the property with the step-up tax basis, her long-term taxable capital gains are $500,000.
If she were taxed without the step-up tax basis, she would have paid taxes on a gain of $1.85 million because her parents purchased the property for $150,000 in 1974.
The Bottom Line
As you can see, there are tremendous benefits to using inheritance loans.
Initially, a private 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 that the passing of a loved one is a difficult event. It's important to deal with a professional and reliable company.
Contact us today to explore inheritance loan options in California.