The grieving process is always challenging. But for many families, the slow legal process of distributing an inheritance compounds emotional pain with financial uncertainty. When pressing needs for money arise long before the estate is settled, an inheritance advance can be a lifeline.
If you are considering an inheritance advance, it’s important to understand the tax implications. This guide from Inheritance Funding explains inheritance advances and the federal and state tax laws so you can make an informed decision.
When a person passes away, their assets — including property, investments and cash — are counted as their estate. A court process called probate oversees the distribution of assets from this estate to the beneficiaries in the form of inheritance. Probate involves:
This process takes anywhere between six months and three years before heirs receive their money. Whether probate takes a few months or a few years depends on potential delays like court backlogs, complex assets that are difficult to value or legal disputes between beneficiaries. Inheritance advances relieve the financial pressure that often results from the long process of probate.
An inheritance advance is a financial service that provides an heir with a portion of their expected inheritance right away. Getting an inheritance advance lets you access your money now, rather than waiting months or years for probate to end.
An inheritance advance isn’t a loan. It’s an asset purchase. If you get an inheritance advance, you are selling a portion of your asset — the inheritance you’re entitled to that’s currently tied up in probate — to the financial service provider in exchange for a lump sum of cash today.
When you sign your agreement with the inheritance advance company, you’ll agree to a fixed fee up front, which the estate will pay to the company directly after probate, along with their assigned portion of your inheritance, which reimburses them for the advance amount. You don’t have to make any payment yourself. At this point, you’ll also receive the remainder of your inheritance.
The fixed fee buys you instant access to a portion of your inheritance and compensates the advance provider for waiting until probate ends to get their money back. Most reputable inheritance advance providers only charge this fixed fee. This means the duration of probate and the final amount of inheritance you get won’t result in you paying any extra costs. If your final inheritance is less than expected or fails to pay out, you keep the advance and owe nothing more, while the company takes the loss.
An inheritance advance differs from a loan because:
An inheritance advance isn’t considered taxable income in the United States. There are two basic reasons for this. Firstly, the IRS doesn’t tax inheritances as income. Secondly, your inheritance advance is just an early portion of your inheritance, so the IRS doesn’t tax the advance either. The transaction between you and the advance company doesn’t affect your money’s tax status as an inheritance.