Can a Beneficiary Borrow Money from a Trust?

Trusts are a common estate planning tool used to manage assets and provide for beneficiaries upon passing of the original trustees of the trust. However, many beneficiaries and trustee are unsure about whether or not they can borrow from the trust. In this article, we’ll explore this question in depth and provide answers to some related questions.

Can a Beneficiary Borrow Against a Trust?

Yes, a beneficiary can borrow against a trust if the trust allows for it. The trust document will outline the rules and limitations for borrowing against the trust. If the trust allows for loans the beneficiary can borrow from the trust by following the procedures outlined in the trust document. Typically, the trustee or successor trustee will need to approve of and initiate the trust loan.

Can a Beneficiary Borrow Money from an Irrevocable Trust?

Yes, a beneficiary can borrow money from an irrevocable trust, but only if the trust document allows for it. Unlike revocable trusts which can be amended or terminated, irrevocable trusts cannot be changed once established or once the original trustee(s) has passed. If the trust allows for loans, the beneficiary can borrow from the trust according to the trust’s guidelines.

Lending against real estate within an irrevocable trust is often only provided by specialized irrevocable trust loan lenders. They are typically private lenders who make short-term loans directly to the trust and use the trust-owned real estate as collateral. Conventional lenders are generally not able to lend to an irrevocable trust.

Using a Trust as Collateral for a Loan

A trust can be used as collateral for a loan unless the trust documents specifically prohibit a loan against trust-owned assets. Real estate assets are often the preferred collateral to use for a trust loan. Real estate-based loans often have better interest rates and terms compared to other types of trust or estate lending. In the case of an irrevocable trust, the successor trustee will need to apply for and sign the loan documents for the loan.

Can a Beneficiary Withdraw Money from a Trust?

Yes, a beneficiary can withdraw money from a trust if the trust allows for it. The trust documents will outline the rules and limitations for a beneficiary withdrawing money from the trust. If allowed by the trust, the beneficiary can request a withdrawal distribution from the trustee according to the trust’s rules and guidelines.

Can a Trustee Take Out a Home Equity Loan on a Property that is in a Trust?

Yes, a trustee can take out a home equity loan on a property that is in a trust. If the property is owned by a living trust or revocable trust, the trustee should request a home equity loan from a conventional lender such as a credit union, bank or other type of traditional institutional lender.

If the property is currently within an irrevocable trust, the successor trustee will need to contact an irrevocable trust lender. Irrevocable trust lenders generally only provide short-term lending of 1-2 years for home equity loans on inherited property. The trustee will need to have an exit strategy for paying off the loan or refinancing within that time frame. Common strategies include selling the property or transferring the property from the trust to an individual and then refinancing with a conventional long-term lender.

Can a Trustee Borrow Money from a Trust?

Yes, a trustee can borrow money from a trust if allowed by the trust. A trustee will often need cash to take care of debts, expenses and other responsibilities of the trust. If the trust does not currently have sufficient cash on hand, the trust may borrow against trust-owned real estate to raise the needed funds.

Can a Trustee Withdraw Money from an Irrevocable Trust?

Yes, a trustee can withdraw money from an irrevocable trust if the trust allows for it. The trustee will need to follow any specified procedures outlined in the trust documents and act in the best interest of the trust.

Conclusion

Borrowing money from a trust can be a straight-forward process as long as the trust documents allow for borrowing and the trustee can identify a suitable lender to work with. When borrowing from a trust, it’s important to review the trust documents and consult with an experienced trust attorney. It is also necessary to communicate all potential actions to all the other trustees and beneficiaries for proper transparency.

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