You have no cash in your estate and creditors are coming after you and your home for payments. It is a horrible situation that people down on their luck have to face each and every day. The feeling of losing it all can cause sleepless nights and restless days. The one question on your mind might be, “Is there still a way for me to keep my home?”
The Answer is Yes, But…
There are several ways that the home may transfer while still paying off the creditors of the estate. First and simplest, the person receiving the home may pay off the debts himself. If this is not feasible, you may borrow money against the home in order to pay off the creditors and the expenses of administration. You could then request that the court order the home passed to the beneficiary subject to the encumbrances.
Borrowing money against the estate is not something to be taken lightly, however. There are risks involved for the estate, yourself, and even the beneficiaries. In general, if you are considering borrowing money in the name of the estate, there are a few key points you should consider with the help of a professional estate planning attorney.
Should You Even Borrow Money in the First Place?
To determine if you should consider borrowing money against the estate, ask yourself these questions:
- Is the property specifically devised? The general rule is that specifically devised property – given to a named party – is taken subject to the loan. However, some will provisions require paying off the debt prior to passing the property, in which case the sale of other estate assets may be necessary to attempt to the pay the bills.
- Can the estate and/or the beneficiaries repay the loan? If a ready source of repayment is not available, the loan generally should not be sought. However, if a beneficiary would like to receive the asset and not the cash, you may be able to borrow and pass the asset with the encumbrance.
- Do the beneficiaries of the estate consent? Written consent of the surviving spouse is required to encumber real, community property. It is advisable to discuss with and obtain consents from the beneficiaries of the estate in all circumstances prior to consenting to a loan, in order to make the administration as smooth as possible. You could, however, have the final say on how to finance the estate cash needs, subject to court approval.
- Do the beneficiaries of the encumbered property consent to the terms of the proposed loan?
- How much cash does the estate need to close out administration? You should be very careful taking out a large loan against a parcel of property. If the remaining bills are relatively low compared to the value of the real estate and are primarily medical bills and consumer debt, the case is better for obtaining the loan.
- What are the market conditions for the property? Can the property be sold easily and at a high value or is the value of the home declining? Depending on the answer, you may need to reevaluate your decision.
- What are the terms of the proposed loan? Estate loans are generally lent at a higher interest rate and service fees than a loan to an individual. You will need to determine if this higher interest rate is worth the risk under the circumstances.
What are Some Risks of Borrowing?
While borrowing money can certainly be a way for you to keep your home away from the hands of creditors, it goes without saying that it carries risks. Even small loans could be a gamble, depending on the circumstances. If you are going to borrow against your estate, you should be aware that lending money to the estate as the personal representative or a third party or devisee without court approval is inherently risky. A personal representative who lends money to the estate will not receive priority in repayment. The advance is considered a general debt and puts you in the same place as the estate’s other creditors.
Additionally, you may be personally liable for a loan from a third party if you sign without first obtaining court approval. A devisee may or may not receive repayment if they loan money to improve property that they receive at the end of estate administration.
Why Should You Seek Court Approval?
In general, court approval is the safest route if you are considering borrowing against estate assets. A personal representative with full Independent Administration of Estates Act (IAEA) power may borrow without court approval, but still will need to send notice to the interested parties. The lender, however, may still require court approval for the loan. All parties who receive the notice of proposed action, including creditors, are prohibited from challenging it later if they fail to file a timely objection.
Administering insolvent estates and navigating demanding beneficiaries can become a difficult and extensive process if you attempt to do it unprepared. If you believe that a loan may be necessary to close out an estate, the wise choice is to contact an Alameda County estate planning attorney from Randick O’Dea Tooliatos Vermont & Sargent. Our firm offers free initial consultations to all of our clients and always keep you up-to-date on your case so you never feel left out of the loop. Call (510) 344-2599 today.
