An estate that holds a note can collect the payments until it closes and then pass the note to the heirs, sell the note and distribute cash, or sell part of it to cover the estate’s costs. Which is right depends on what the estate owes and what the heirs want.
An estate is one of the situations in which a note gets sold by someone acting for other people. The reader this page has in mind is that person: the executor, administrator or trustee, called the personal representative in many states. If you are an heir trying to understand a note you have been left, start with what heirs should do first.
Where a note sits among the estate’s assets
A bank account has a balance and a house has a market value. A note is harder to pin down, being a right to receive payments over years, secured by a property the estate does not own.
That leaves you with two practical problems. The estate needs a value for the note, for the inventory and for dividing things fairly. It may also need cash sooner than the note will produce it, for debts, taxes or the costs of administration. Meanwhile the note keeps running, and somebody has to receive and record the payments.
Your duties while the estate holds the note
A personal representative is generally expected to look after estate assets with care. For a note, the everyday version of that looks like this.
- Secure the originals. That means the signed note and the recorded mortgage, deed of trust or contract. Keep them somewhere safe and tell the estate’s attorney where they are.
- Redirect the payments. Write to the payer with evidence of your authority and the account payments should go to, which the attorney will normally want to be one in the estate’s name.
- Keep a ledger. Enter every payment, with date and amount, from the date of death onward. Heirs and buyers will both ask for it.
- Check the property. Confirm the taxes are current and the insurance is in force, since either lapsing puts the estate’s security at risk.
- Leave the terms alone. A request from the payer for a lower payment or a discounted payoff is a decision to take with advice, and the phone call in which it is made is the wrong moment to answer it.
What exactly your duties are, and what you need permission for, depends on the state, the will and the court, so ask the estate’s attorney whenever you are unsure.
Putting a value on the note
The figure nearest to hand is the unpaid balance, and it overstates the asset. The balance is what the payer owes. The value is what someone would pay for the right to collect it, which is lower because a buyer sets a price that lets the payments give them the return they want on their money.
What a note is worth to that buyer depends on things specific to it: how long and how cleanly the payer has paid, how much equity sits in the property, the interest rate, the lien position (whether this note is first in line against the property or behind another loan), and how complete the paperwork is.
A number can come from a written offer from the market, with its worksheet, or from a formal valuation by an appraiser. For the first, once your ledger is up to date you can send us the note’s details for pricing. Which of the two the court or the tax return calls for is a question for the attorney and the CPA.
Holding, selling and part-selling compared
| Hold and distribute the note | Sell the whole note | Sell part of the note | |
|---|---|---|---|
| Cash to the estate now | Only the monthly payments | The full sale price | A lump sum for the payments sold |
| What the heirs receive | The note itself, in shares | Cash | Cash now, the note later |
| Suits | One heir, or heirs who want income | Several heirs, or an estate with debts | An estate short of cash whose heirs want to keep the note |
| Main drawback | Heirs become co-owners of one payment stream | The discount is taken on the whole balance | Heirs still have to agree who holds the note |
Holding means the note is assigned from the estate to the heirs. With one heir that is a single document. With several, they become co-owners, and every later decision about the note needs all of them.
In a full sale the estate assigns the note to a buyer and receives the price at closing. The money joins the rest of the estate and is distributed in the usual way.
The third column takes more explaining. In a partial note purchase the estate sells a fixed run of the coming payments, for example the next three or five years of them, and receives a lump sum that is smaller than a full sale would bring but is matched to what the estate has to pay out. After the buyer has collected those payments the note is assigned back, either to the estate if it is still open or, more realistically, to the heirs named to receive it. Because the arrangement can outlast the estate by years, the agreement should name who receives the note when it returns. Buyers offer this only where the payer’s record gives them confidence in those particular payments.
What a buyer needs from an estate
A buyer checks an estate’s note the same way as any other, then asks whether the person in front of them can sign. Expect to be asked for:
- The court document showing your appointment, or the trust document naming you as trustee.
- A death certificate.
- The note, the recorded security document and any earlier assignments.
- The payment record, including the period since the death.
- Any court order approving the sale, where one is required.
Whether a sale needs court approval, notice to the heirs or their written consent varies with the state and with the powers the will gives you, so whether an executor can sell the estate’s note is a question to answer before the buyer asks it.
Keeping the heirs on side
An heir who thinks the note went too cheaply and an heir who wanted the income but was handed cash are both complaints you can see coming, and both are easier to prevent than to answer afterwards.
The first is met with evidence. Ask more than one buyer for a price where you can, keep the worksheets that come with the offers, and circulate the numbers before you decide, including what keeping the note would pay in total. The second is met by asking each heir directly, in writing, whether they want cash or income. Their replies go in the estate file next to the offers.
Questions to settle with the estate’s attorney before you accept an offer
Take these to the attorney as soon as selling looks likely, because the buyer will want the answers too and the closing depends on them.
- Do my powers under the will or the court’s appointment cover selling this note without further approval?
- Must the heirs be notified, or consent in writing?
- Does the court or the tax return need a formal valuation, or will written offers do?
- If only part of the note is sold, who should be named to receive it when it is assigned back?
The attorney can answer more precisely with a price on the table, so bring the written offers and your ledger to that meeting and ask for the answers in writing. They belong in the estate file, next to the heirs’ replies.
Related questions
Does an estate have to sell a note it holds?
No. The note can be assigned to the heirs and kept. Selling is a choice, usually made because the estate needs cash for debts or costs, or because several heirs would rather divide money than share a payment stream.
Who receives the payments while the estate is open?
Normally the estate does, through an account in its name, with the personal representative keeping a record. Ask the estate's attorney to confirm the arrangement for your state before telling the payer where to send money.
Can an estate sell only part of a note?
Yes, if the payer's record is steady enough for a buyer to offer one. The estate sells a fixed run of the coming payments for a lump sum, which can cover its costs. The agreement should state who receives the note when it is assigned back, since the estate may have closed by then.