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How to Obtain Financing for Executors, Administrators, Trustees, Conservators and Guardians

By Rick Harmon, The Suburban Group – Mortgage Bankers

An overview of increasingly popular methods for attorneys to use probate or
trust owned property to finance estate debt, pay attorney fees and to buy out
other heirs’ interests.

Fiduciaries such as executors, administrators or trustee may borrow on behalf
of the estate and sign for the loan in that capacity.

Using the real property currently vested in an estate (or trust) to secure
financing can resolve many problems can be solved in short order. As is the
case in any loan, of course, a few conditions will have to be met to assure
a smooth, orderly transaction as well as providing for all of the legal requirements
of estate administration.

Mortgages are typically based on the remaining equity in the real property.
This method is primarily used when goal of estate is to pay attorney fees, creditors,
or to provide liquidity prior to close of probate.

How Financing Works

There are two main ways in which financing estate property can be accomplished.
Each method has variations which can be tailored to the individual probate case.
The essential ingredients are comprised of the “security” (the real estate)
and the “borrower” (the estate representative, trustee or heir/beneficiary).
We must then establish whether the client will be borrowing in the capacity
as the estate rep. or trustee (not as a natural person) or if they’ll be “buying”
the property from the estate and using their own credit and income to qualify.

Who’s The Borrower?

Therefore, achieving your client’s financing goal will largely depend on how
they will sign for the loan. The key to remember is that how they will sign
makes a difference to the lender, a big difference. That is to say, will the
borrower be signing on behalf of the estate or personally?

Other Important Questions

If signing as the executor, are they also a beneficiary? Are there other beneficiaries
who are to be paid from this loan? Have all parties agreed to what they are
to receive? Must this loan occur during the course of probate or may it coincide
with the estate’s closing? What is the distribution plan (i.e., will some parties
will receive cash in lieu of property)? Anticipating these questions early on
will help your case close much smoother and sooner.

While an executor or other fiduciary may possess a future interest or distributive
share in an estate, that is not always the case. Corporate and personal fiduciaries
may sign for a loan on estate owned real property without having any interest.
However, borrowers signing for loans as fiduciaries have no personal liability
and this provision permits such a loan without requiring personal or corporate
guarantees. The lack of personal obligation necessitates that fiduciary loans
are not only non-recourse but based largely on the protective equity which will
remain on the property.

Also, issues as to powers to execute mortgage documents regarding Full Authority,
Limited Authority, no powers to sign, and what is required for a trustee of
a trust to legally sign are significant factors.

Mortgage financing is increasingly used by attorneys to as an attractive alternative
to selling probate estate, conservatorship and trust owned real property. The
following financing techniques are those which most frequently are used to provide
cash liquidity or give heirs the ability to retain estate owned property for
almost any reason. Frankly, the possibilities are almost limitless and the resulting
variations permit financing to be tailored to the needs of all parties to an
estate, especially the attorney. Consider how financing could help you to close
probate sooner if you applied the following:

Financing Technique #1

Borrower signs for mortgage as executor or administrator of estate

Goal:

Pay attorney fees, creditor claims and other costs of administration. Borrower wishes to retain property

Interest in Estate:

Has 100% distributive share

Distribution Plan:

Fund proceeds go to estate for attorney, creditor or other distribution. Real property is distributed to heir subject to mortgage to estate; may elect to personally assume mortgage obligation or not (see PC 9805)

Timing: (After 4 month creditor period)

With Full Authority, expect three (3) weeks for noticing and loan processing before loan docs can be signed and loan funded. With Limited Authority, prepare Petition to Borrow, expect five (5) weeks before loan docs can be signed and loan funded.

Benefits to Parties:

Facilitates fast close of probate; permits retention of real property without requiring sale; no disruption in living habits; costs less than selling

Financing Technique #2

Borrower signs for mortgage as executor or administrator of estate

Goal:

Pay attorney fees, creditor claims and other costs of administration. Borrower wishes to retain property for own or others’ benefit.

Interest in Estate:

Has fractional (partial) distributive share interest.

Distribution Plan:

Fund proceeds go to estate for attorney and creditor distribution. Real property is distributed to heir(s) subject to mortgage to estate. Borrower acts only in fiduciary capacity. No personal liability by borrower unless loan assumed; may elect to personally assume mortgage obligation or not (see PC 9805).

Timing: (After 4 month creditor period)

With Full Authority, expect three (3) weeks for noticing and loan processing before loan docs can be signed and loan funded. With Limited Authority, prepare Petition to Borrow, expect five (5) weeks before loan docs can be signed and loan funded.

Benefits to Parties:

Can be used to avoid distribution to heirs as tenants-in-common if that result is preferred.

Financing Technique #3

Borrower signs for mortgage as executor or administrator of estate

Goal:

Pay attorney fees, creditor claims and other costs of administration. Borrower wishes to retain property for benefit of others.

Interest in Estate:

Has no beneficial interest; acts only fiduciary capacity

Distribution Plan:

Fund proceeds go to estate for attorney and creditor distribution. Real property is distributed to heir(s) subject to mortgage to estate. Borrower acts only in fiduciary capacity; no personal liability by borrower. Distributee(s) may elect to personally assume mortgage obligation or not (see PC 9805).

Timing: (After 4 month creditor period)

With Full Authority, expect three (3) weeks for noticing and loan processing before loan docs can be signed and loan funded. With Limited Authority, do Petition to Borrow, expect five (5) weeks before loan docs can be signed and loan funded.

Benefits to Parties:

Can be used to successfully pacify a difficult or uncooperative heir residing in estate owned real property without obligating executor personally.

Financing Technique #4

Borrower signs for mortgage as Trustee of Intervivos, Testamentary or other Trust.

Goal:

Pay attorney fees, creditor claims and other costs of administration. Borrower wishes to retain property for own or others’ benefit.

Interest in Estate:

May have full, fractional or No beneficial interest in trust.

Distribution Plan:

Fund proceeds go to estate for attorney and creditor distribution. Real property may be distributed to trust beneficiaries subject to mortgage; Trustee and/or beneficiaries may elect to personally assume mortgage or not.

Timing:

If Trust Agreement provides for trustee to have authority to borrow/encumber, expect three (3) weeks for loan processing before loan docs can be signed and loan funded. If trustee authority an issue, Nunc Pro Tunc order can often resolve. If not, expect five (5) weeks before loan docs can be signed and loan funded.

Benefits to Parties:

Real property may remain in trust (not change trust funding status). Permits maximum flexibility to structure financing without transfer or tax flagging.

Q & A on Loans to Probate Estates and Trusts

Q. If borrower signs for a mortgage loan on property owned by the
estate as executor, administrator, or any other fiduciary capacity, is s/he
personally liable for this loan?
A. No. Borrowers are responsible to the estate in their fiduciary capacity
only, i.e., as the personal representative of the estate, neither a late payment
(nor a default) will affect personal credit history. This does imply that
you have certain duties to act in a responsible manner with the money the
estate has borrowed, maintain a high level of trust for the benefit of all
parties concerned (including the attorney, creditors and bonding company,
if applicable). You must plan to be accountable for how you use the loan proceeds.
Q. Can I use the money for myself?
A. If you are borrowing as a fiduciary, the money belongs to the estate
until the court permits some or all of the proceeds to be distributed. If
you are borrowing individually and signing for your loan personally, title
to the property will have been put in your name on or prior to your loan having
been completed. In that case, any proceeds (cash out) is yours to use as necessary
unless, as condition of receiving that loan, the lender limits how the funds
are to be used.
Q. What arrangements can be made if the executor or administrator
can’t afford to make monthly payments?
A. One of the benefits of using equity financing is that it often permits
more flexibility in structuring a repayment plan. For instance, an estate
with sufficient equity in the property may borrow and request that future
payments from several months to years be made in advance to insure that payments
are provided for, until other arrangements are made.
Q. Are mortgages assumable?
A. Mortgages made to executor, administrators or other fiduciaries may
be assumed or payments taken over by heirs, but not usually by third parties.
Some FHA loans made to individuals to purchase estate property may be assumable
after qualifying and a small fee.
Q. Can I buy out another heir when I don’t have any cash for a
down payment?
A. You may be able to buy the property from the estate using your distributive
share in the estate or trust (your inheritance). Heirs can sometimes use this
share just like a down payment, depending on the value of this share relative
to the loan you’ll need and your ability to qualify for a loan (just like
any other buyer). Every estate’s situation is unique, so your chances of obtaining
financing will largely depend on how much you equity you will ultimately have
in this property, your credit and income strength as a borrower, and the level
of experience and understanding your lender has in obtaining financing.

A Few Practical Words About Banks and Others Lenders

Here are a few thoughts to consider when selecting a lender for a probate
estate mortgage:

Traditional lenders won’t lend to probate estates and trusts. Like most enterprises,
traditional lenders build their businesses on providing loan services to the
greatest number of clients who comprise their customer base, typically, the
conventional mortgage market. For the average lender, dealing with the complexities
of probate estate or trust administration, attorneys, courts, changing laws
and often difficult clients is too much and not worth their time. Sincere lenders
who are not prepared for such a transaction will advise the borrower accordingly
and decline to accept an application.

Viewed from the big picture, loans made to probate estate fiduciaries represent
a very small percentage of the potential mortgage market. This market is not
served by traditional lenders for two main reasons:

  1. Federally insured banks and savings institutions have lending limitations
    relating to their charters which prevents them from lending to estate entities,
    and
  2. This market niche is too small and requires a disproportionately large
    amount of expertise from a staff who is clearly not trained in such specialized
    lending services.

In summary, insist on seeing references and proof of experience in lending
on property currently held in probate or trust before deciding on what lender
to apply for a mortgage. This one action alone my save a significant amount
of wasted time and money.

For a more detailed examination of how to use either mortgage financing method
to close your estate matter, please contact Rick Harmon at: (714) 572-2400 (California
probates only, please)

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