Irrevocable Trust Loans - 3 Reasons Beneficiaries Borrow

Irrevocable Trust Loans – Can an Irrevocable Trust Get a Loan or Mortgage?

Can an irrevocable trust get a loan or mortgage? Successor trustees and beneficiaries who have recently inherited trust assets often find themselves asking this question when they need a trust equalization loan. Lending to an irrevocable trust is available but typically only from specialized irrevocable trust loan lenders.

Irrevocable trust loans to beneficiaries and trustees allow for borrowing against trust-owned real estate. This is essentially a home equity loan against the real estate within an irrevocable trust. A living or family trust becomes an irrevocable trust once the original trustees have passed. Lending to an irrevocable trust is generally required for three reasons.

3 Reasons Beneficiaries Borrow Against an Irrevocable Trust

  1. Borrowing cash to pay for the trust’s expenses
  2. Buying out other beneficiaries to keep the property (trust equalization loan)
  3. Avoiding a property tax reassessment with Prop 19 or 58

1. Borrowing cash to pay for the trust’s expenses

Once the original trustees have passed, beneficiaries and successor trustees need to ensure the financial expenses of the trust are being paid. Various expenses must be paid such as property taxes, mortgage payments, property maintenance and repairs, and legal fees. Lending money to a trust to cover these expenses is a faster and easier option than having the trust sell assets. Mortgage loans to irrevocable trusts can be funded in as few as 5-7 days.

A successor trustee can encumber real estate assets owned by the irrevocable trust in order to raise the needed funds (if allowed by the trust documents). Irrevocable trust lenders need to review the trust documents as well as any amendments made to the trust.

2. Buying out other beneficiaries (siblings) to keep the property

Siblings and beneficiaries of an irrevocable trust often face the challenge of dividing trust-owned real estate assets. One sibling may want to sell the property and receive cash while another sibling may want to keep the property. If the trust doesn’t have enough assets to evenly split things between the siblings an irrevocable trust loan can help.

If the trust-owned real estate has sufficient equity, the sibling who wants to keep the property can use an irrevocable trust loan to borrow against the property and use the loan proceeds to buy out the other sibling(s). Irrevocable trust mortgage financing will be required to assist with the distribution of the real estate asset.

Conventional lenders such as banks and credit unions cannot typically provide an irrevocable trust mortgage as the sibling’s name is not on the title of the property.

An irrevocable trust loan lender is able to provide the loan directly to the trust with the loan proceeds going directly to the trust’s bank account. The funds then can go to the siblings who are being paid off for their interest in the real estate. Once the siblings have been paid, the title of the property can be transferred from the name of the trust to the name of the sibling who is keeping the property.

Once the property title is in the name of the sibling, they can then refinance the irrevocable trust loan into a long-term loan from a conventional lender.

3. Avoiding a property tax reassessment with Prop 58 or Prop 19

Another reason beneficiaries obtain an irrevocable trust loan is so they can file for Proposition 58 (California) and avoid a property tax reassessment. Real estate owned by trusts have often been in the family for decades. Properties in California that have been owned for a long period of time typically a very low tax assessment relative to their current value due to Proposition 13. Prop 13 limits the annual increase on the existing property tax assessment value.

Prop 58 allows beneficiaries to prevent a property tax reassessment for transfers of real estate from the trust into the name of the beneficiary. Preventing a property tax reassessment can save thousands of dollars each year in property taxes.

To qualify for Prop 58 and obtain a reassessment exclusion from the county, the transfer of real estate must be directly from parent (trust) to child (beneficiary).

A beneficiary may have cash in their personal bank account they could use to pay off their siblings in exchange for sibling’s interest in the real estate. This transaction would not qualify for Prop 58 as it would be seen as a sibling to sibling to transfer since cash is being paid by one sibling to another. Sibling to sibling transfers do not qualify for Prop 58. A “3rd party loan” or Prop 58 loan would be required. Now that Proposition 19 has passed in California, beneficiaries will need to obtain a Prop 19 loan and comply with the new requirements to avoid a property tax reassessment.

As discussed previously, irrevocable trust loan proceeds go directly to the trust. The trust then pays the beneficiary who is being paid off. Once the bought-out beneficiaries no longer have an interest in the property, title can be transferred from the trust to the beneficiary who will keep the property. This will qualify as a parent to child transfer. Now that the title has been transferred into the name of the beneficiary, the beneficiary can pay off the irrevocable trust loan with cash or refinance with a bank loan.

READ MORE: Understanding Irrevocable Trust Loans

*Consult an attorney or a tax professional to ensure the transfer is handled correctly in order to take advantage of Prop 58 or Prop 19.

Irrevocable Trust Loan Lenders

Irrevocable trust loan lenders provide short-term financing directly to an irrevocable trust. An irrevocable trust loan lender is usually a private money lender, which means the source of funds for the irrevocable trust mortgage is private investors as opposed to large banking institutions. Irrevocable trust mortgage financing is typically available for up to 3 years while most loans are written for 12 months and paid off much earlier.

An irrevocable trust lender is not able to provide a long-term 30-year irrevocable trust mortgage. If the property needs to stay within the irrevocable trust it will be difficult or impossible to obtain irrevocable trust mortgage refinancing. If the property is going to be transferred out of the trust and into an individual’s name, an irrevocable trust loan lender will be able to help. Once the property transfers out of the trust, the individual can refinance the irrevocable trust mortgage with a long-term conventional loan.

Irrevocable Trust Mortgage Refinancing

Irrevocable trust mortgage refinancing from specialized irrevocable trust lenders provides the successor trustee and beneficiaries with fast and easy financing to help distribute assets of the trust and equalize the distribution. Irrevocable trust mortgages can be funded within 5-7 days as long as there are not any issues with title or other delays that must be resolved prior to funding the loan. Traditional mortgages as well as reverse mortgages against the trust-owned property can be refinanced by the irrevocable trust mortgage.

The irrevocable trust mortgage is only intended to be a short-term loan to assist with the trust distribution. Once the property title has transferred out of the trust and into the name of the beneficiary that will keep the property, the beneficiary will be able to contact a conventional lender and start the process to refinance the irrevocable trust mortgage into a long-term traditional loan.

Related: Can a Beneficiary Borrow Money from a Trust?

Using a Trust as Collateral for a Loan

Using a trust as collateral for a loan is available when the trust has real estate assets with sufficient equity. Irrevocable trust lending in California is straightforward as the trust loan lender will record a note and deed of trust against the California real estate. Using a trust as collateral for a loan is an excellent short-term option when used to help equalize a trust distribution between beneficiaries or borrowing to fix up and sell a trust-owned property.

Why Might a Bank not Lend Money to an Irrevocable Trust?

Banks typically do not lend money to an irrevocable trust for various reasons. In many irrevocable trust loan request situations, the original trustor of the trust has passed and a new successor trustee would be applying as the borrower on behalf of the trust. This is an outside the box scenario for a conventional lender in which they would likely require that the real estate is transferred out of the irrevocable trust prior to providing trust financing.

A bank or conventional lender that lends to irrevocable trust may not be able to sell this loan on the secondary mortgage market which would prevent them being able to provide the loan to begin with.

Some attorneys advise clients to put real estate assets directly into an irrevocable trust as opposed to taking title in a living, revocable or inter vivos trust. Placing the real estate into an irrevocable trust is supposed to offer additional asset protection to the owner of the property but unfortunately this drastically reduces the types of financing available for the real estate.

Refinance Reverse Mortgage in Irrevocable Trust

Beneficiaries of an irrevocable trust may find themselves in a situation where an inherited property has a reverse mortgage. Reverse mortgage companies have a bad reputation for being aggressive and threatening foreclosure once the original trustee has passed. If the beneficiary wants to keep the property they will not be able refinance the reverse mortgage with a conventional lender because the property is in an irrevocable trust.

Unless the beneficiary has cash, they will need to refinance the reverse mortgage with an irrevocable trust loan lender. Refinancing the reverse mortgage will stop the harassment from the reverse mortgage company. This will give the beneficiary time to transfer the property into their name and then obtain a long-term conventional loan.

Probate & Estate Loans

Irrevocable trust loan lenders generally provide other types of inheritance loans such as probate and estate loans. Probate and estate loans are also secured against inherited real estate assets. The process is similar to trust loans. The estate loan is made to the estate directly and real estate is used to secure the loan. Estate loans are commonly used for the same reasons as trust loans. An estate loan to buy out siblings is one of the most popular reasons an estate loan is requested.

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

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Irrevocable Trust Loan Frequently Asked Questions

An irrevocable trust can receive a loan if the trust owns real estate with sufficient equity to borrow against. The trust documents must allow for the successor trustee or beneficiary to borrow against the trust-owned real estate. The loan would be made directly to the trust with the trust being the borrower.

An irrevocable trust cannot guarantee a loan. The irrevocable trust can allow for a loan to be secured by trust-owned real estate assets but this isn’t considered a guarantee. A borrower is not able to guarantee their own debt. An individual can guarantee the debt of another individual or entity.

Refinancing a house in an irrevocable trust is possible but only from irrevocable trust loan lenders. Conventional lenders cannot refinance a house in an irrevocable trust as the borrower is not currently on title of the property. The irrevocable trust loan lender can provide a short-term refinance loan that allows a beneficiary to buy out other siblings and then transfer the property into the beneficiary’s name. Once the property title is in the name of the new owner, the house can be refinanced into a long-term conventional loan.

A trustee can borrow against real estate assets owned by an irrevocable trust as long as the original trust documents allow for borrowing against real estate.

A trust can get a mortgage from a conventional lender while it is a living or revocable trust. Once the original trustees pass, the trust becomes an irrevocable trust and will only be able to receive a short-term loan from an irrevocable trust loan lender. Read more: Can a trust get a mortgage?

An irrevocable trust can get a mortgage secured by trust-owned real estate. The trust documents must allow for taking out a mortgage against the real estate by the successor trustee(s). The real estate owned by the irrevocable trust must also have sufficient equity in order to obtain a mortgage. Mortgage loans to irrevocable trusts must be approved by the successor trustee.

An irrevocable trust can use real estate assets as collateral to obtain a mortgage.

An irrevocable trust can obtain a home equity loan against trust-owned real estate from a specialized trust loan lender. The real estate must contain sufficient equity relative to the loan amount being requested.

An irrevocable trust can obtain a loan against trust-owned real estate but typically not a HELOC (home equity line of credit). HELOCs are generally provided by conventional lenders for primary residences. Conventional lenders do not provide loans against real estate owned by an irrevocable trust.

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