What To Know About Taking Loans From Trusts

Trust Lawyer

Trusts can be very useful tools for people to protect their wealth for their heirs’ use. However, they can also be complex, especially since there are several types of trusts. As a trust lawyer from a firm like W.B. Moore Law can explain, it’s sometimes possible to take out loans from a trust for a beneficiary, but that’s not always the case. Keep reading for further information on taking loans from trusts.

Can Beneficiaries Take Loans From Trusts?

The short answer to this is question is yes, in some instances beneficiaries can take loans from a trust. This is the case for both revocable and irrevocable trusts. Irrevocable loans require approval from the trustee in order for the beneficiary to take a loan from the trust. A trust loan company will oversee the process with applications from both the beneficiary and trustee. The trustee will file an application on behalf of the trust using trust-specific information while the beneficiary will file an application detailing their own financial situation. Real estate is frequently used as collateral for a loan from a trust.

When Can Beneficiaries Take Loans From Trusts?

Depending upon the intent of the individual who established the trust (the grantor), trust documentation could specify that the trust may give loans to beneficiaries. Without this information stated expressly in the trust documents, the trustee cannot normally make loans from the trust to anyone. When loans are permissible, the trustee should follow the procedures for granting regular distributions and complete all necessary paperwork.

Just because a beneficiary requests a loan, does not mean that the trustee must grant it. Trustees have a fiduciary duty to the trust and must make decisions in the best interest of that trust. Therefore, if a beneficiary cannot demonstrate their ability to repay a loan, a trustee may deny the loan request. 

Who Should Not Take Loans From a Trust?

Trustees should not normally make loans to themselves, even if they are also a beneficiary. This is one reason having a trustee who is not a beneficiary can be wise. It could be considered a breach of fiduciary duty for a trustee to approve a loan to him or herself from a trust.

How Are Loans Facilitated?

In some instances, loans can be made expressly from the trust to the loan recipient. However, loans from trusts are often facilitated through a third party who provides funds to the trust which in turn gives that sum to the beneficiary. Contact a living trust lawyer if you need specific information regarding your trust loan situation.

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