Quick Guide to Getting a Loan for Your Irrevocable Trust

Navigating the financial landscape of an irrevocable trust can feel complex and restrictive. As a successor trustee or beneficiary, it may seem that real estate assets held within the trust are locked away and inflexible. There are various situations where an irrevocable trust needs liquidity and real estate financing would be the best solution.

Many trustees are surprised to learn that traditional banks are often unwilling or unable to lend to an irrevocable trust. This is where a specialized direct lender like North Coast Financial can help.

This guide will outline the step-by-step process, showing how to secure real estate financing for an irrevocable trust.

What is an Irrevocable Trust Loan?

First, let’s clarify the basics. An irrevocable trust is a legal arrangement where assets are transferred from a grantor to a trust, which is then managed by a trustee for the benefit of beneficiaries. The key word is “irrevocable”, meaning the trust generally cannot be easily changed.

An irrevocable trust loan is a loan made directly to the trust itself, with the trust listed as the official borrower. The loan is secured against the real estate owned by the trust.

Trusts seek loans for several important reasons:

• Property Maintenance & Repairs: To fund necessary upkeep, renovations, or property taxes on real estate held in the trust.
• Equalizing Beneficiary Distributions (Buying Out a Beneficiary): To provide a cash distribution to one beneficiary without having to sell a property that another beneficiary wishes to keep.
• Preventing a Property Tax Reassessment with Proposition 19 or 58 (California): Beneficiaries can utilize an irrevocable trust loan as a 3^rd party loan and apply for the benefits of Prop 19 or 58. Consult a trust attorney or CPA.
• Preventing a Forced Sale: To access cash for trust expenses or distributions, avoiding the need to sell real estate assets.

Who is Eligible for a Trust Loan? (Trustees vs. Beneficiaries)

This is a critical point of confusion for many.

The Successor trustee is the only person with the legal authority to act on behalf of the trust. The loan application is made by the trustee in their official capacity. The trust, not the trustee as an individual, is the borrower.

Beneficiaries, while they stand to benefit from the trust, cannot apply for a loan on its behalf. However, a loan is often taken out for their benefit, such as in the case of a sibling buyout or an early inheritance distribution. Clear communication between the trustee and beneficiaries is essential for a smooth process.

Step-by-Step: How to Get a Loan From an Irrevocable Trust

Securing a loan for an irrevocable trust is a straightforward process. Following these steps will ensure you are prepared and can avoid unnecessary delays.

Step 1: Review the Trust Documents

This is the most important step. The trust document must allow for the successor trustee (or not explicitly prevent) the power to borrow money and use trust assets as collateral. An experienced irrevocable trust loan lender will review this document carefully to confirm the successor trustee’s authority.

Step 2: Consult with Beneficiaries

As a fiduciary of the trust, the trustee has a duty to act in the best interests of the beneficiaries. We always recommend that the trustee communicates about the loan to all beneficiaries to ensure transparency and prevent any misunderstandings.

Step 3: Gather Required Trust Documentation

Being prepared with the right documents will significantly speed up the process. (See the full list in the next section).

Step 4: Find the Right Lender

Most traditional banks will not lend to an irrevocable trust due to the complexity. You need a lender who specializes in this area. Direct hard money lenders like North Coast Financial have the expertise to underwrite and fund these loans quickly.

Step 5: Application & Underwriting

Once you submit your application, the lender will perform its due diligence. This includes a thorough review of the trust documents, a valuation of the real estate being used as collateral and an assessment of the overall loan scenario.

Step 6: Closing & Funding

After approval, loan documents are signed by the successor trustee. The funds are then disbursed directly to the trust’s bank account, ready to be used for their intended purpose.

Required Documents for a Trust Loan

To ensure a fast and efficient process, have the following documents ready when you apply:

• A full copy of the Trust documentation.
• Government-issued identification for the successor trustee(s).
• Details on the real estate being used as collateral (address, property type, etc.).
• Copy of affidavit of death of trustee or an original death certificate.
• Financial statement on beneficiary who will keep the real estate (if applicable).

Common Challenges and How to Overcome Them

While the process is straightforward with the right partner, trustees can face a few common hurdles.

• Challenge 1: The Trust Document Lacks Borrowing Power.
  • Solution: In some cases, it may be possible to petition the court to grant the trustee borrowing authority. Consulting with a legal professional is advised.
• Challenge 2: Disagreements Among Beneficiaries.
  • Solution: Proactive and clear communication is key. The beneficiaries and successor trustees need to be in agreement on the trust loan prior to moving forward. If a dispute arises, mediation or legal counsel can help resolve the issue before it jeopardizes the loan.
• Challenge 3: Difficulty Finding a Lender.
  • Solution: This is a common problem. The solution is to skip the traditional lenders and banks and work directly with a private money lender who has a proven track record of successfully funding irrevocable trust loans.

Your Partner in Trust Lending – North Coast Financial

Securing a loan for an irrevocable trust is entirely possible and often the most prudent financial decision for managing trust assets effectively. While the requirements are specific, the process is not overwhelming when you work with an experienced and knowledgeable lender.

If you are a trustee looking to leverage real estate assets within your trust, North Coast Financial is here to help. We have the expertise to navigate the complexities and provide fast, reliable funding.

Contact North Coast Financial today for a free consultation on your irrevocable trust loan needs.