Top Reasons Beneficiaries or Heirs Need to Borrow Money

When a parent dies and leaves his or her estate to children and other heirs, the estate assets must be equalized before any money or property can be distributed. Oftentimes, trustees or administrators who have to worry about paying the cash-poor trust or estate’s expenses find there is too little cash in the estate to achieve these goals. As a result, trustees and administrators are often forced to sell valuable property in order to raise the money needed to pay basic expenses.

Banks and credit unions aren’t the most helpful entities in this situation, mostly due to risk-averse policies. They won’t typically make loans to trusts or estates, or they tend to make them so prohibitive that they are not worth the hassle. By contrast, a private loan from HCS Equity provides a convenient and more affordable solution, offering faster review and approval with no prepayment penalties, more flexible terms, and availability of funds within a shorter period of time.

Private loans can infuse a trust or estate with the cash needed to achieve the family’s goals without having to sell real estate assets, points out Mara Erlach, senior counsel at Greene Radovsky Share and Hennigh LLP on behalf of HCS Equity.

A private loan made to an irrevocable trust or estate allows trustees or administrators to borrow against real estate assets owned by the trust or estate. The following are a few reasons why it would make sense for beneficiaries to borrow via a private loan in these circumstances.

Avoiding Property Tax Reassessments with Prop 58 or Prop 193

One reason beneficiaries take out private trust loans is so they can file for Proposition 58 in California and thereby avoid a property tax reassessment. Real estate owned by trusts have likely been in the family for decades. Properties in California that have been owned for long periods of time usually have a very low tax assessment relative to their current value because of Proposition 13, which limits the annual increase on the existing property tax assessment value.

To recap, Proposition 58 stipulates that real property transfers, from parent to child or child to parent, are excluded from reassessment. By extension, Proposition 193 brings tax relief to include transfers from grandparent(s) to grandchild(ren). In either case, you must file a claim within three years of the date of transfer in order to get the full benefit of the exclusion.

Beneficiaries can use Prop 58 to prevent a property tax reassessment when the real estate transfers from the parent’s trust to the beneficiary, with the ability to potentially save the beneficiary thousands of dollars in property taxes annually.

In some cases, the beneficiary or heir seeking to retain the property may have their own personal funds in the bank to buy out the other beneficiaries — please keep in mind this type of transfer does not qualify for Prop 58 because it is considered a sibling to sibling to transfer due to the cash being paid by one beneficiary to another, and will trigger reassessment. In this case, a third-party loan is required to preserve the property tax basis, which can be repaid the following day by the beneficiary retaining the property.

Beneficiaries or heirs of a trust or estate often have no choice but to divide trust or estate owned real estate assets. Perhaps one beneficiary or heir wants to sell the property and get the cash, but another would rather keep the property (and its Prop 58 property tax basis). If the trust or estate simply does not contain enough assets to evenly split assets between the beneficiaries or heirs, a private trust loan can help. Thus enables the beneficiary to buy property from the estate.

Beneficiary Buying Property from a Trust

If the trust-owned real estate has sufficient equity, the sibling who wishes to keep the property can use a loan to borrow against the property and use the proceeds to buy out any other siblings. Third party loans to trusts or estates can balance out the value of beneficiaries’ interests in the trust assets while keeping the corresponding property tax exemptions.

Pay for the Trust or Estate’s Expenses

Borrowing cash to pay for the trust or estate’s expenses is another major reason. Expenses of the estate include creditor claims, property taxes, mortgage payments, property maintenance and repairs, legal administrative expenses and death taxes among others, says Bankrate. These still all have to be paid in a timely manner, but when there is no cash in the trust or estate in which to do this, borrowing money makes sense.

Lending money to a trust or estate to cover all of these expenses is a faster, simpler option than selling assets. By leveraging cash from a private loan, trustees and administrators provide a valuable service to families who otherwise must forfeit their valuable real estate as a consequence of trust or estate administration.

Contact HCS Equity

Beneficiary Buying Property from a Trust or Estate

To learn more about how borrowing with a private loan can help you as a beneficiary, contact us 877-427-9820 or feel free to fill out our online form. We are proud to be a financial resource for estates experiencing shortages in liquidity, working directly with estate executors or estate attorneys to quickly create liquidity. This not only solves immediate financial problems but also funds buyouts of heirs and other beneficiaries.