Probate is a court process whereby a decedent’s will is proved to be valid. The court ensures that it’s terms are carried out, that all debts and expenses are paid, and the beneficiaries receive the balance as the decedent intended.
In a prior life, I represented a life insurance company whose specific market was insuring people who faced huge estate tax liabilities at death. These people did not want their heirs to liquidate estate assets in order to come up with the cash to pay the estate tax. Perhaps they owned a successful business and they wanted that business to continue. Maybe they had established a foundation or had a charity that was important to them, or just wanted their heirs to benefit from the years of hard work that went into building up their estate. So, paying premiums during their lifetime was less painful than the estate being decimated because of the lack of cash.
Sometimes, an estate attorney will find a seller carryback note as one of the estate’s assets. As he determines the extent of the liabilities and the cash needed to pay those liabilities, it may become obvious that the estate will not be able to settle because there is not enough cash available to pay these liabilities before distributions can be made to the heirs. Plus, the heirs may not live in the area, or have no interest in receiving payments from someone who lives hundreds or thousands of miles away. Selling this note can help the attorney acquire some of the capital the estate needs while satisfying the heirs desire to turn assets into cash.
Conversely, there could be a probate situation that would be ideal for the creation of a seller carryback note. If a decedent owned a home with no mortgage, the estate had sufficient cash to pay debts, the heirs had no pressing need for cash and were comfortable receiving monthly payments, the home could be sold at market value with the heirs offering to carryback the note. This can work very well where the heirs live in the area, perhaps are business people, or have had experience in real estate investing.
The existence of a seller carryback note in an estate can be the source of cash the estate needs to pay debts, expenses and taxes. The creation of a seller carryback note on an inherited property, free and clear of a mortgage, can be an ideal source of income for the heirs. And, if there is no cash urgency for the estate, the heirs would also be free to sell the home to a qualified buyer, allow the attorney to settle the estate, and the heirs to receive their final distributions.
