What is a Trust Loan?
A trust loan is a specialized type of loan typically only made by private money lenders. Conventional lenders such as banks and credit unions are generally not able to provide this type of loan as 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 and then have a beneficiary or trustee guarantee the loan.
The trust agreement must allow for a loan from the trust to the beneficiary (or trustee) to borrow against the real estate. Trusts commonly allow for the trustee to obtain a trust loan for the benefit of the trust or beneficiaries. Trustees can encumber and pledge assets of the trust and guarantee debts for the benefit of the trust and beneficiaries.
Trust Loans to Beneficiaries
Trust loans are frequently used by beneficiaries (siblings, heirs) who wish to divide an interest in trust-owned real estate assets. 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 the beneficiaries.
Lending to a trust involves making the loan directly to the trust and securing the loan against real estate assets owned by the trust. The successor trustee will need to approve of the trust loan and sign the loan documents and disclosures. In many cases, a successor trustee or beneficiary of the trust will provide a personal guarantee for trust loan.
Lending to a Trust (Irrevocable or Living)
Lending to an irrevocable trust requires approval and action from the successor trustee(s). 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 1-2 weeks to 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.
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.
Loans for Proposition 58 & 193 – Avoid Property Tax Reassessment
Trust loans 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 trust loan) 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 selling their interest in the real estate are paid off directly from escrow. 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.
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.
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