When it comes to trust agreements, the trustees are often granted the ability to make loans to beneficiaries. It’s important to give a lot of consideration and thought before doing so, however. Not only do tax implications come into play, but documentation of the loan and due diligence are essential elements to make sure that you aren’t crossing any lines.
Giving Loans to Beneficiaries
Giving a loan to a beneficiary can be an advantageous alternative to making a distribution. To determine if this is the right course of action, you (as the trustee) should consider the following:
- Does the trust agreement allow loans to be granted to beneficiaries? If it doesn’t, you will not be able to make the loan.
- If a loan is permitted, how will you document the loan and follow the correct internal procedures?
- Does the beneficiary have sufficient collateral for the loan to be made? Because the trustee has the responsibility to maintain the integrity of the assets in the trust, making a loan without adequate collateral may be frowned upon by the courts and suffer legal ramifications.
- Does the beneficiary have the means to repay the loan? Enough information should be collected that you are reasonably sure that the beneficiary will be able to repay the loan as outlined by the terms of the agreement.
The beneficiary may have a couple of different options when it comes to repayment of the loan. The repayment can be taken from money the beneficiary might have received from the trust. Trustees can also make payments on behalf of the beneficiary. The trust documents will generally determine how these payments can be made. Keep in mind that the IRS may pay particular attention to any loans made from the estate, so it’s best to examine and document everything carefully.
Giving Loans to Trusts
In certain situations, you as the trustee may want to borrow money from the trust. Generally speaking, this is allowable if the funds are being used in a way that is beneficial to the trust beneficiaries. For example, you may want to refinance a property held in the trust to receive a lower interest rate.
In these situations, the trust agreement should be reviewed by an experienced trust lawyer to determine if it is admissible. An attorney will know the laws applicable to your situation so you can ensure compliance with them. For example, The Truth in Lending Act or other consumer protection laws that you aren’t aware of may come into play.
No matter what reason there is for the loan, it’s always a good idea to make sure all of your documentation is correct and in order. Be sure to speak with an estate lawyer in Sacramento to discuss your options.
Thanks to the Yee Law Group for their insight into estate planning and granting loans from a trust.