Inheritance buyout - buying out other beneficiaries

Inheritance Buyout – Buying Out Other Beneficiaries

An inheritance buyout is typically needed when multiple heirs or beneficiaries inherit real estate from an estate or a trust. Inheritance buyouts are used in situations when one beneficiary wishes to keep the property while the others want cash. A trust loan or probate loan can be placed against the property which allows the beneficiary to keep the property and pay off the other beneficiaries with cash. The beneficiaries are commonly siblings but any individual can be named as a beneficiary in a trust or will.

Inheritance buyout loans are known by numerous other names such as trust beneficiary buyouts, trust loans, irrevocable trust loans, estate loans to buyout siblings, Prop 58 loans (California), home equity loans on inherited property and inheritance loans.

What Happens When a House is Inherited with Siblings?

An inherited house left to multiple siblings is typically handled in one of the following ways:

    • The inherited property is sold and the sale proceeds are distributed – This straightforward approach allows the siblings to sell the property, share the expenses of the selling costs and then divide what is left
    • The inherited property is kept by all siblings – The property can be a vacation home for the siblings or become a rental property with the siblings sharing the rental income
    • The inherited property is kept by one or more siblings while the others receive cash in exchange for their interest – This option often requires an inheritance buyout loan to provide the liquidity to pay off the other siblings.

How to Buy Someone Out of an Inherited House

If the house is main asset of the inheritance, it is likely that one sibling will need to buyout the other sibling(s). If sibling who is buying out the other doesn’t have enough cash, they will need to borrow against the equity in the inherited house to free up cash for the inheritance buyout.

Read More: How to Buy Someone Out of an Inherited House

Inventory and Valuation of Trust or Estate

It is important to do an inventory of the trust’s or estate’s assets that are going to be divided among the beneficiaries and determine the values. The value of the real estate can be determined by hiring an appraiser to provide their 3rd party opinion of value. Attorneys often recommend obtaining a “date of death” appraisal and distributing the inheritance based on that value. Once the inventory and valuations are complete, the beneficiaries can determine who is going to get what. Then they can calculate the specific loan amount needed for the inheritance buyout in order to equalize the distribution.

Determine Who Has the Legal Authority to Act on Behalf of Trust or Estate

The beneficiaries must determine who has authority to act on behalf of the trust or estate. For a trust this person is often referred to as the successor trustee in the trust documents. There may be one successor trustee or there may be multiple co-trustees.

For an estate, the person able to act on behalf of the estate is typically known as the probate administrator on the letters of the administration that are issued by the probate court. The probate administrator will need to have the letters of administration with full authority in order to sign for the probate loan without getting additional court approval.

Read More: How to Refinance an Inherited Property to Buy Out Heirs

Why Can’t I Get an Irrevocable Trust Loan or Estate Loan from a Bank?

Traditional and conventional lenders do not lend to estates or irrevocable trusts. For these types of loan scenarios, the party requesting the loan is a successor trustee or probate administrator, not the original trustee or original owner of the property. Having an individual apply for a loan who is not the current owner of the property is generally outside of a traditional lender’s typical criteria.

In some cases, a traditional lender will incorrectly think they can provide an irrevocable trust loan. They commit to providing a loan to the irrevocable trust and start the underwriting process. The lender eventually discovers that they can only make loans to living or revocable trusts, not irrevocable trusts. This results in wasted time and frustration for everyone involved.

Find a Specialized Trust Loan Lender or Probate/Estate Loan Lender

It is important to find a lender that specializes in loans to estates and irrevocable trusts. They are typically known as trust and estate loan lenders. Trust and estate loan lenders are typically private money lenders that provide loans secured by real estate.

The trust and estate lender provides an assumable loan which means the original loan is made to a specific borrower (trust or estate) and then can be assumed by a different individual (beneficiary) when the property transfers out of the entity. Most traditional loans can be called by the lender immediately when the property transfers.

Requirements for Trust Loan Approval

Trust Loan Application Forms

Since the trust is the actual borrower on the loan, the successor trustee will need to complete a loan application on behalf of the trust. The application requests basic information on the trust as well as the assets the trust currently holds. Another loan application will need to be completed by the individual who will own the property going forward. The individual needs to show they have sufficient financial strength in order to either refinance the trust loan with a traditional loan or pay off the loan with other assets in the future.

Copy of Trust and Any Amendments to Trust

Trust documentation will be required to verify who is the successor trustee, who are the beneficiaries of the trust and what share of the assets each beneficiary receives. The title insurance company will need to review the trust to ensure the proposed trust loan is allowed by the trust documents. Any amendments to the trust will also need to be reviewed.

Affidavit of Death or Original Death Certificate

The affidavit of death or an original death certificate is needed to verify that the original trustee has passed and that the assets of the trust can now be distributed to the beneficiaries.

The information provided herein is for educational purposes only. North Coast Financial is not providing any legal, tax or financial advice.

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Jeffrey A. Hensel

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