Things To Consider Before Making a Loan to a Trust Beneficiary

For anyone with assets they would like to reserve for their own or their family’s future, trusts are an excellent way to make that happen. Trust funds can cover sizeable expenses, including:

  • Education
  • Healthcare
  • Funerals
  • Real Estate

During uncertain times such as these, trust owners may wish to loan funds to beneficiaries. Consideration of the following will determine if that is a sound or realistic decision:

Type of Trust

As a rule, assets put into a trust are there to ensure future needs. However, with revocable trusts grantors, or owners, can rethink the terms of trusts or close them entirely. Therefore, even if a trust has a clause that strictly forbids it, a loan is possible. If a trust is irrevocable, it is usually impossible to remove funds even if they are needed to further the current needs of the beneficiary. In rare instances, state laws permit amendment to irrevocable trust terms, provided that the trustee and all beneficiaries agree. The rules and circumstances governing irrevocable trust loans are very complicated, so if there is any possibility that a grantor may wish to make a loan to a beneficiary, it is better to establish a revocable trust.

Types of Assets

The assets held in a living trust can determine whether a loan to a beneficiary is possible. For instance, as long as the trust does not prohibit loans, and repayment terms are clear, a transfer of liquid funds directly to a beneficiary is straight-forward. However, if a trust mainly consists of real estate and other non-liquid assets, the grantor must liquify these through a secondary loan obtained through other means. In such cases, the non-liquid assets become collateral. Grantors will seek private lenders rather than banks that are ineligible to offer trust loans due to federal regulations. Private lenders come with a considerable downside of hefty interest rates, and the trust risks losing its assets if the beneficiary is unable to repay the loan.

Number of Beneficiaries 

All beneficiaries and the trustee must approve loans that are allowable by trusts. When there is a single beneficiary, the trustee alone executes fiduciary responsibility to determine if a loan makes sense. However, if a trust names multiple beneficiaries, none can receive a loan without the consent of each of them and the trustee. Only after unanimous consent can the trustee initiate formal paperwork to distribute the funds.

A trust lawyer, such as from Citadel Law Firm, is the best person to advise individuals on establishing trusts and managing their goals during troubling times.