Can You Get a Loan on Your Inheritance?

Here is a new idea for people inheriting property: You can, in fact, take out a loan on your inheritance!

Why would you want to borrow money against your inheritance?

Let me explain. It is pretty common for children to inherit a house or houses as part of a parents’ Estate Plan. Sometimes, however, more than one kid (beneficiary) wants to have the house but there is not enough money in the Trust (or Estate) to give the house to one and an equivalent amount of cash to others. So what do you do?

How can you make an equal distribution to all the kids when one wants the house?

The beneficiary who wants the house would need to buy the other beneficiaries out. In other words, she would pay the other kids for their share of the house. For example: Let’s say the house is worth $400,000 and there are 4 kids. They each have a 1/4 share or $100,000 in house value. If one sister wants to buy her siblings out, she has to come up with $300,000 to pay them for their shares. But how would that beneficiary come up with the $300,000 in my example?

My friend John Burroughs, a mortgage broker and I met today to discuss this very situation, when you might need or want to get a loan on your inheritance.

What we discussed what that she could borrow money against her inheritance in order to pay buy the other siblings out. She would get a house loan for $300,000 secured by the house. It is not an easy thing to do, because conventional lenders do not like to make these loans, but private lenders often are willing. Usually the loan is temporary until the estate is all settled. After the estate is settled, the borrower gets a better, permanent loan.

Why is getting the house better than getting the inheritance money and buying their own house?

In our example, since the beneficiary is still technically getting the house from her parents’ estate, after buying out her siblings, the benefits are as follows:

• The beneficiary gets to keep property taxes low (at parent’s rate) and own the real property.
• She gets the benefits of being a landlord.
• It makes cash available to the other beneficiaries quickly.

We see this type of situation in our office from time to time and like to remind our clients that in this and other complicated estate situations that they should considered the tax angle, the legal angle, and the estate planning angle. Please let me know if you need help structuring a deal like this.

AS ALWAYS – THIS IS NOT LEGAL ADVICE. If you need legal advice about how to get a loan on your inheritance, please contact me. My team and I are here to help. GQ