Trust Loans in California

What is a Trust Loan? Can a Trust get a Mortgage?

A trust loan is a type of inheritance loan typically only made by a specialized trust loan company or private money lenders. Lending money to a trust is generally not available from conventional lenders such as banks and credit unions since the borrower does not currently have their name on title of the real estate. North Coast Financial is able to make a trust loan directly to the trust.

The trust document must allow for the beneficiary (or trustee) to borrow against real estate owned by the trust. Trusts commonly allow for the trustee to obtain a trust loan for the benefit of the trust or beneficiaries. The trustee or successor trustee is the individual with the authority to encumber and pledge real estate assets of the trust as security for the loan.

READ MORE: Can a Trust get a Mortgage?

Trust Loan Requirements

There are few trust loan requirements but each one is important:

• Real estate

  • The trust must own real estate to be used as collateral for the trust loan. The trust loan is secured against the real estate just like a traditional mortgage.

• Trust documents must allow for successor trustee to borrow against trust assets

  • The successor trustee of the trust must have the ability to borrow against the assets of the trust. Most trusts allow for borrowing against trust-owned real estate or do not explicitly prevent a successor trustee from borrowing.
  • The successor trustee will need to initiate the loan application and review and sign all of the trust loan disclosures and documents.

• Sufficient equity in the real estate

  • The real estate owned by the trust must have enough equity relative to the loan amount being requested. Trust loan lenders can typically lend up to 65-75% of the current value of the real estate. In many cases, any existing loans against the property will need to be refinanced by the new trust loan in order to borrow additional funds. A trust loan in 2^nd position may be possible depending on the specific loan scenario.

• Ability to repay the trust loan

  • Trust loans are short-term financing solutions that are typically available for 12-24 months. The trust loan lender will need to know how the loan will be repaid. The most common ways of repaying the loan are refinancing with a traditional loan, selling the property or repaying the trust loan with cash.
  • If the plan is to refinance into a traditional loan, the individual who will own the property going forward will need to demonstrate they have the financial strength and credit scores to obtain the traditional loan.

Can a Beneficiary Borrow Money from a Trust?

A beneficiary can borrow money from a trust as long as the trust documents allow for borrowing. The vast majority of trust documents do allow for borrowing against the trust’s assets. The beneficiary can borrow money from the trust and use the trust’s real estate assets as collateral for the loan. The trust loan must be approved and signed by the successor trustee of the trust, who may also be a beneficiary.

Trust Loans to Beneficiaries

Trust loans to beneficiaries involves making the loan directly to the trust and securing the loan against real estate owned by the trust. The successor trustee will need to approve of the trust loan and sign the loan documents and disclosures. Obtaining a trust loan when buying out a siblings share in an inherited house can be processed and funded in as few as 5-7 days. The monthly loan payments and ultimate refinance of the trust loan are the responsibility of the beneficiary buying the property from the trust.

Trust loans are frequently used by beneficiaries (siblings, heirs) who wish to divide an interest in trust-owned real estate. Often one of the beneficiaries wants to maintain ownership of the real estate while other beneficiaries want cash in exchange for their interest in the property. Trust lending solves the problem by providing fast and flexible funding for a trust beneficiary buyout.

Trust Beneficiary Buyout

A trust beneficiary buyout can be completed quickly and easily with the help of a trust loan from a California trust loan specialist. The trust loan provides the trust with cash which is used to buy out beneficiaries who do not wish to maintain an interest in the property. Once the beneficiaries have received their funds, the title of the property can be transferred to the beneficiary who will own the property going forward. Now the property-owning beneficiary can obtain a traditional loan in order to refinance the trust loan.

Buying out a trust beneficiary with a trust loan can have valuable property tax implications. The trust loan is considered a 3rd-party loan which allows for the beneficiary who is buying the property to apply for Proposition 58 in California and prevent a property tax reassessment (see additional information on Prop 58 below).

Lending to an Irrevocable Trust

Can an irrevocable trust get a loan? Yes, as long as the successor trustee(s) approves of the loan being placed against the real estate and is able to complete the loan process. This is a specialized type of loan typically only available from irrevocable trust loan lenders. The successor trustee will be required to review and sign various loan documents and disclosures related to the irrevocable trust loan. Lending to a living trust (revocable trust) would be handled by the current trustee.

Lending to a trust typically takes 5-7 days to process and fund as long as there are no issues with title and trustee is able to review, sign and return the trust loan documents and disclosures in a timely manner.

READ MORE: Understanding Irrevocable Trust Loans

Trust Loan Interest Rates

Trust loan interest rates are commonly in the range of 9.75-10.95% for a 1st loan while rates for a 2nd loan against the trust-owned property are likely to be around 12%. Trust loan interest rates are higher than conventional interest rates as the trust loan is only a short-term lending solution. For most trust loan borrowers, the temporary higher interest rates are worth the added expense to give the trust the needed liquidity. As long as the trust distributes or sells the real estate in a reasonable amount of time, the higher trust loan interest rates don’t end up being a significant expense.

Once the real estate is transferred from the name of the trust into the name of an individual, the property can be refinanced into a long-term conventional loan. If the plan is to sell the trust property, the sales process will automatically payoff the trust loan.

Family Trust Loans – Lending Money to a Family Trust

Family trust loans allow for a trustee to obtain a mortgage secured by real estate within a family trust. Borrowing money from a family trust allows the trustee (or successor trustee) or beneficiaries to raise cash in order to divide ownership in a property, assist a beneficiary or take care of other obligations of the trust.

The family trust loan is made directly to the trust. Typically the trustee or one of the beneficiaries is made responsible for making the loan payments and ensuring the family trust mortgage is paid off.

Prop 19 Loans – Avoid Property Tax Reassessment

Proposition 19 took effect on February 16, 2021. Prop 19 allows property owners to avoid a property tax reassessment when transferring a primary residence from a parent to a child (trust to child beneficiary). The property must have been the parent’s principal residence and the property must become the child’s principal residence after the transfer. The exclusion for the reassessment only applies up to a cap of $1 million above the property’s current property tax basis. Above this threshold there will be a partial reassessment.

Prop 19 loans can provide the trust with the needed funds for a cash buyout of other beneficiaries. The Prop 19 loan is considered a 3rd party loan which prevents the need for beneficiaries to use personal cash assets in order to equalize the distribution of the trust assets. Using personal assets may result in a partial reassessment of property taxes when applying for Prop 19 with the county.

Loans for Proposition 58 & 193

Proposition 58 and 193 apply to situations in which the original trustee of the trust passed away prior to February 16, 2021. Consult a trust attorney to determine eligibility for Prop 58 and 193.

Lending money to a trust can also help a beneficiary utilize Proposition 58 in order to avoid a property tax reassessment. California’s Proposition 13 keeps property taxes at reasonable levels as property values appreciate over the years. Prop 58 allows for the exclusion of a property tax reassessment for parent to child transfers. This allows heirs to take advantage of a tax basis kept low by Prop 13. Loans for Prop 58 can save the beneficiary thousands of dollars each year in property taxes.

Attorneys often advise clients to obtain a 3rd-party loan (Prop 58 loans) in order to buy out another beneficiary’s interest in real estate owned by a trust. Loans for Prop 58 are made directly to the trust. The beneficiaries who are accepting cash instead of real estate are paid directly from the trust’s bank account. Once the other beneficiaries are paid and no long have an interest in the real estate, title can be transferred from the parent’s trust directly to the child who will maintain ownership of the property.

Proposition 193

Similar to Prop 58 loans, Prop 193 excludes a property tax reassessment on the transfer of real estate from grandparents to grandchildren. The transfer is eligible for Prop 193 when the parents of the grandchildren are deceased as of the date of the real property transfer.

Proposition 13

Prop 13 limits property tax increases on any given property to no more than 2% as long as the property is not sold or transferred. This allows property owners to estimate the amount of future property taxes. Proposition 13 was passed in California on June 6th, 1978.

*Consult an attorney or a tax professional to ensure the transfer is handled correctly in order to take advantage of Prop 58 or 193.

• Frequently Asked Questions on Proposition 58 from California State Board of Equalization

A claim for reassessment exclusion for transfer between parent and child or from grandparent to grandchild must be filed with the county where the real estate is located. Additional information and forms are listed below.