Can a Beneficiary Borrow Money from a Trust? Trust Loans to Beneficiaries

Trusts are a common estate planning tool used to manage assets and provide for beneficiaries upon passing of the original trustees of the trust. Trust loans to beneficiaries can be an invaluable tool to solve a short-term issue. However, many beneficiaries and trustees are unsure if it is possible to obtain a loan from a trust to a beneficiary. In this article, we’ll explore beneficiary trust loans in depth and provide answers to some related questions.

Can a Beneficiary Borrow Against a Trust?

Yes, a beneficiary can borrow against a trust if the trust allows for it. The trust document will outline the rules and limitations for borrowing against the trust. If the trust allows for loans the beneficiary can borrow from the trust by following the procedures outlined in the trust document. Typically, the trustee or successor trustee will need to approve of and initiate the trust loan.

How Does Borrowing Against a Trust Work?

Borrowing against a trust works much like any loan secured by real estate, with the trust itself as the borrower. First, the trustee or successor trustee reviews the trust document to confirm that borrowing is permitted. Next, the trustee identifies a lender that funds loans to trusts. For property held in an irrevocable trust, this is typically a specialized irrevocable trust lender such as North Coast Financial rather than a bank. The lender underwrites the loan based on the equity in the trust-owned real estate, not the beneficiary’s income or credit score. Once approved, the loan is made to the trust and secured by the property. The funds are then used or distributed according to the trust’s terms, commonly to buy out other beneficiaries or to pay expenses of the trust.

These loans are short-term, usually 1 to 2 years, so the trustee should have an exit strategy such as selling or refinancing the property.

Can a Beneficiary Borrow Money from an Irrevocable Trust?

Yes, a beneficiary can borrow money from an irrevocable trust, but only if the trust document allows for it. Unlike revocable trusts which can be amended or terminated, irrevocable trusts cannot be changed once established or once the original trustee(s) has passed. If the trust allows for loans, the beneficiary can borrow from the trust according to the trust’s guidelines.

Lending against real estate within an irrevocable trust is often only provided by specialized irrevocable trust loan lenders. They are typically private lenders who make short-term loans directly to the trust and use the trust-owned real estate as collateral. Conventional lenders are generally not able to lend to an irrevocable trust.

Can a Trust Lend Money to an Individual or Beneficiary?

Yes, a trust can lend money to an individual or to a beneficiary if the trust document grants the trustee the authority to make loans. When a trust acts as the lender, the trustee must act in the best interest of all beneficiaries. That usually means charging a fair market interest rate, often based on the Applicable Federal Rate (AFR), securing the loan where appropriate, and documenting the loan in writing. A trust loan to a beneficiary is frequently used so that one beneficiary can buy out the interest of the others in an inherited property.

Because these lending decisions carry fiduciary responsibility, the trustee should review the trust document and consult an experienced trust attorney before the trust lends money.

Can You Borrow Against a Revocable or Living Trust?

Yes. Because a revocable trust, also called a living trust, can be amended by the original trustee while they are alive, borrowing against property in a revocable trust is usually straightforward. Once the original trustee has passed and the trust becomes irrevocable, borrowing against the property requires a specialized irrevocable trust lender. North Coast Financial lends against property in both revocable and irrevocable California trusts. Call (760) 722-2991 to learn more.

Using a Trust as Collateral for a Loan

A trust can be used as collateral for a loan unless the trust documents specifically prohibit a loan against trust-owned assets. Real estate assets are often the preferred collateral to use for a trust loan. Real estate-based loans often have better interest rates and terms compared to other types of trust or estate lending. In the case of an irrevocable trust, the successor trustee will need to apply for and sign the loan documents for the loan.

Borrowing Against a Trust Fund

A trust fund is simply the collection of assets held within a trust, which can include real estate, cash and investments. Whether you can borrow against a trust fund depends on what the fund holds and what the trust document allows. When the trust fund includes real estate, the trustee can often borrow against that property by obtaining a loan secured by the real estate, the same way an individual borrows against a home. When a trust fund holds only cash or securities, borrowing typically takes the form of a distribution or an internal loan rather than a mortgage. As with any trust borrowing, the trustee must follow the rules set out in the trust document.

Can a Beneficiary Withdraw Money from a Trust?

Yes, a beneficiary can withdraw money from a trust if the trust allows for it. The trust documents will outline the rules and limitations for a beneficiary withdrawing money from the trust. If allowed by the trust, the beneficiary can request a withdrawal distribution from the trustee according to the trust’s rules and guidelines.

Can a Trustee Take Out a Home Equity Loan on a Property that is in a Trust?

Yes, a trustee can take out a home equity loan on a property that is in a trust. If the property is owned by a living trust or revocable trust, the trustee should request a home equity loan from a conventional lender such as a credit union, bank or other type of traditional institutional lender.

If the property is currently within an irrevocable trust, the successor trustee will need to contact an irrevocable trust lender. Irrevocable trust lenders generally only provide short-term lending of 1-2 years for home equity loans on inherited property. The trustee will need to have an exit strategy for paying off the loan or refinancing within that time frame. Common strategies include selling the property or transferring the property from the trust to an individual and then refinancing with a conventional long-term lender.

Can a Trustee Borrow Money from a Trust?

Yes, a trustee can borrow money from a trust if allowed by the trust. A trustee will often need cash to take care of debts, expenses and other responsibilities of the trust. If the trust does not currently have sufficient cash on hand, the trust may borrow against trust-owned real estate to raise the needed funds.

Can a Trustee Withdraw Money from an Irrevocable Trust?

Yes, a trustee can withdraw money from an irrevocable trust if the trust allows for it. The trustee will need to follow any specified procedures outlined in the trust documents and act in the best interest of the trust.

Conclusion

Trust loans to beneficiaries can provide quick financing to solve a short-term issue. Borrowing money from a trust can be a straight-forward process as long as the trust documents allow for borrowing and the trustee can identify a suitable lender to work with. When borrowing from a trust, it’s important to review the trust documents and consult with an experienced trust attorney. It is also necessary to communicate all potential actions to all the other trustees and beneficiaries for proper transparency. Creating a solid plan and working with a reputable irrevocable trust lender will allow for a smooth process to obtain a loan from a trust to a beneficiary.

The information provided herein is for educational purposes only. North Coast Financial is not providing any legal, tax or financial advice.