Can a Trustee Borrow Money from a Trust?

Trusts are legal structures that help with estate planning and wealth management. At the heart of every trust is the trustee, the individual responsible for safeguarding and managing the trust’s assets for the benefit of the trust and trust’s beneficiaries. Often times a situation will arise that requires a trustee to borrow money from the trust to satisfy a short-term need of the beneficiaries or the trust itself.

Can a trustee borrow money from a trust?

Yes, a trustee can borrow money from a trust as long as the trust documents allow or do not specifically prohibit the trustee from borrowing against the trust’s assets. The trustee should consult a trust attorney or estate planning attorney to ensure borrowing money from the trust is permitted. The borrowed funds are typically required to only be used for the benefit of the trust or beneficiaries.

Can a trustee borrow money from an irrevocable trust?

A trustee can borrow money from an irrevocable trust if the trust documents give the successor trustee(s) the ability to borrow against trust-owned real estate. The trustee would be borrowing funds against the real estate on behalf of the trust for the benefit of the trust. The irrevocable trust loan would be secured by a deed of trust recorded against the real estate of the trust. The loan proceeds would go directly to the irrevocable trust’s bank account.

The trustee of the trust would need to have a reasonable plan for repaying the trust loan. Common exit strategies for this type of situation include transferring real estate out of the irrevocable trust and into an individual’s name (or new living trust) and then refinancing or selling the property. Either of these actions would need to be completed within approximately 12 months.

Why would a trustee borrow money from an irrevocable trust?

Trust expenses

A trustee might face a temporary cash flow issue due to timing differences between a trust’s expenses and income. Common trust expenses include property taxes, insurance, mortgage payments, property maintenance and various other short-term needs. Borrowing with a short-term trust loan can help bridge the gap until the trust can determine a more long-term solution.

Beneficiary buyout loan

Beneficiaries often find themselves in a situation where the main asset of the trust is real estate. One beneficiary may want to keep the property while the other beneficiaries would prefer to have their portion of the inheritance in cash. If the trust doesn’t have sufficient cash of other easily divisible assets the trust will need a loan to raise cash and equalize the distribution of the trust assets. The successor trustee would need to approve of and apply for the trust loan.

The trust loan is secured by the real estate and the trust loan proceeds go directly to the trust’s bank account. The beneficiaries then receive their portion of the inheritance in cash and the beneficiary who will own the property receives the real estate with the attached trust loan. The beneficiary can then refinance the real estate into a long-term traditional loan which will pay off the short-term trust loan.

Repair or improve trust-owned real estate

If the beneficiaries are going to to sell the trust-owned real estate, repairs or improvements may to needed to obtain the highest possible sales price for the property. If the trust doesn’t have sufficient cash, the trustee can borrow against the equity in the real estate to obtain the needed funds.

Can a trustee withdraw money from a trust?

Yes, a trustee can withdraw money from a trust, but this action must be allowed by the parameters established in the trust documents. Trustees have the responsibility to manage the trust’s assets for the benefit of the beneficiaries and are required to follow the instructions outlined in the trust document.

Can a trustee withdraw money from an irrevocable trust?

Yes, a trustee can withdraw money from an irrevocable trust, but this action must be permitted by the trust’s terms and within the trustee’s fiduciary duty. Withdrawing money from an irrevocable trust can be more complex than withdrawing from other types of trusts due to the irrevocable nature of the trust.

Defining irrevocable trusts and trustees

An irrevocable trust is a legal arrangement in which assets are transferred by the grantor to the trust. The terms of the trust are defined by the trust document. Once established, the grantor relinquishes control over the assets, and the trust becomes a separate entity. The trustee is an individual or entity responsible for managing the trust in accordance with the trust terms and for the benefit of the beneficiaries. Trustees have a fiduciary duty to act in the best interest of the beneficiaries while adhering to the defined rules of the trust.

Further considerations for a trustee borrowing money from a trust

Review Trust Documents

Prior to a trustee taking out a home equity loan on a property in a trust, the trustee should review the trust documents. These documents define the terms, conditions, and limitations of the trust. A trust may have restrictions or requirements that must be met before borrowing is considered but most trusts allow for taking out a loan on a trust-owned property. A thorough understanding of the trust documents is necessary to avoid any potential conflicts between trustees and beneficiaries.

Consult a Trust or Estate Planning Attorney

Given the potential complex legal issues with trusts, the trustee should seek guidance from an attorney experienced in trust and estate law. An attorney can offer valuable insights for borrowing from the trust and help interpret the trust document’s language. Their expertise can assist trustees in navigating potential legal pitfalls and ensure that all actions taken are within the boundaries of the trust.

Assess Beneficiary Impact

Trustees must assess how borrowing against the trust’s real estate could impact the beneficiaries’ interests and future inheritance. This involves considering the immediate and long-term effects on the trust’s assets, potential investment strategies and the ability to fulfill future beneficiary distributions. The trustees are responsible for any decisions that affect the beneficiaries’ financial future.

Document the Decision-Making Process

Transparency and accountability are fundamental when a trustee borrows money from a trust. Trustees should document the thought process leading to the decision to borrow from the trust. This documentation can serve as evidence of careful consideration, compliance with fiduciary duties, and adherence to the trust’s objectives. Proper documentation helps demonstrate that the trustee’s actions were in the best interest of the beneficiaries.

Explore Alternatives

Before proceeding with borrowing, trustees should explore alternative options to meet their financial needs. This might involve obtaining external financing, leveraging personal assets or considering other sources of funds. Exploring alternatives can help mitigate potential conflicts of interest and uphold the trustee’s fiduciary duty to act in the best interests of the trust’s beneficiaries.