Can the executor of an estate make a loan to one of the beneficiaries with the understanding that the loaned amount will be deducted from that beneficiary's final distribution?

Answer 1

The answer depends on the laws of the state of probate, because not all states have the same such laws. In general though, the executor can make such a loan, but with some limits. An executor has complete control and possession over all the assets of the estate and has the duty to invest those assets so that they earn the estate income during administration. In that sense, it is possible that an executor could make a loan to a beneficiary at an interest rate higher than what could be gotten if the funds were kept in an estate account. The loan would have to be made with a competitive rate of interest, because those monies would be in the estate account earning interest but are instead in the pocket of the beneficiary. The executor must make absolutely sure that the loan is protected from loss or he will have to pay for any losses.

All states have laws which are referred to as prudent investment acts or some similar wording. They describe the types of investments that executors may make. Some states might specifically prohibit such loans. Others might allow them, but may require more security than just the anticipated inheritance. Those laws must be reviewed first.

There are many dangers in making such loans so they are usually not done. Sometimes beneficiaries lose their rights to inherit or have their rights attached by creditors. If that happens, the executor cannot claim that he has given the beneficiary the inheritance ahead of time. The executor could find himself in the position of having a worthless loan with no security.