Trust Loans to Beneficiaries

Trust loans to beneficiaries are commonly used to provide liquidity once the trust becomes irrevocable. They are short-term loans that help solve a short-term problem until the trust-owned real estate is either sold or distributed to a beneficiary.

Key Takeaways:

• Irrevocable trusts can be borrowed from by the trustee upon the passing of the grantor(s).
• Trustees/Beneficiaries may borrow from the trust for various reasons such as beneficiary buyouts, repairs, taxes and debts
• Trust loans are typically provided by specialized private money lenders
• Trust loans have short terms, high-interest rates and require monthly payments
• The loan is paid off when property is sold, refinanced or repaid with cash

Trust Loans to Beneficiaries – Irrevocable Trusts

A living or revocable trust becomes an irrevocable trust once the grantor(s) passes away. At this point the successor trustee(s) named in the trust document has the authority to act on behalf of the trust. Trust loans to beneficiaries for an irrevocable trust must involve the successor trustee as the successor trustee must sign on behalf of the trust.

Beneficiaries/trustees may need to take a loan against an irrevocable trust on an inherited property for a variety of reasons. The trust loan provides the trust with needed liquidity to solve a short-term issue or help equalize the distribution of the trust assets among the beneficiaries. Some common reasons include:

• Borrowing against the real estate to provide liquidity for a trust beneficiary buyout
• Making repairs or renovations to the property prior to sale or renting the property
• Paying property taxes, insurance and other expenses of the trust-owned real estate
• Paying off debts of the trust
• Using the money as a down payment for another property purchase

Trust loans to beneficiaries for irrevocable trusts are only provided by specialized trust loan lenders. These lenders are typically private money lenders who lend short-term funds secured against real estate. Traditional lenders do not make loans to irrevocable trusts.

How do Trust Loans to Beneficiaries Work?

The irrevocable trust loan is made directly to the trust as the trust is the current owner of the real estate. The successor trustee of the trust must sign for the loan. The trust loan is secured against the property with a note and deed of trust. The proceeds from the loan go directly to the trust’s bank account. The successor trustee then can distribute the funds for their intended purpose.

Trust loans are often made for short terms of 12 months or less. The interest rates are higher than long-term traditional loans. Loan to value ratios of up to approximately 70% are available. Monthly payments are typically required until the loan has been repaid. In some situations, the trust loan amount can be increased so that monthly payments can be held back and made each month on behalf of the trust.

The trust loan is paid off once the property is sold or refinanced. Once the trust distributes the real estate into the name of the beneficiary as an individual, the individual can obtain a long-term traditional loan. The traditional loan refinance process will automatically payoff the trust loan.

Trust Loans to Beneficiaries – Living or Revocable Trusts

If the trust is currently considered living or revocable, the trustee(s) of the trust should be able to obtain a long-term loan from a traditional lender such as a bank, credit union or other large institutional lender. Living trusts are usually considered the same as an individual. Traditional lenders will require income and credit information when making a loan decision.