When you place money or assets in a living trust, you will also appoint a trustee to oversee maintenance and potential distribution to beneficiaries. This trustee will have fiduciary power over the assets within the trust, ensuring that everything is invested and distributed according to your wishes.
You will also determine if you want your trust to be irrevocable or revocable. If you decide to establish an irrevocable trust, you will have legally transferred all rights of ownership to the assets within the trust. The only person that would be able to modify anything within the trust would be the beneficiary. A revocable trust, on the other hand, will allow you to make changes within the trust during your lifetime — providing you with more flexibility over your assets.
If your beneficiary wishes to receive a loan from an irrevocable or revocable trust, they must first go through the trustee. The trustee will only be allowed to grant loans if you specified that permission in your trust document. Without that permission, the trustee will be unable to remove any assets from the living trust, even if it’s revocable.
However, even if the trust does allow for loans, the procedure to withdraw the assets will be similar to standard banking processes. The trustee must follow formal procedure, distributing any documents needed to withdraw from the trust and effectuate the loan. Additionally, not all beneficiaries will receive a loan from the trust just by asking. Usually you will pick a trustee that will uphold your best interests. Therefore, the trustee will need to determine if the beneficiary will be able to repay the loan in a timely manner. If they don’t deem the beneficiary as financially responsible, they have the authority to deny the loan or ask for some sort of security collateral.
In some situations, the named trustee may also be a beneficiary of the trust. In these cases, the trustee will not be able to loan themselves money—even if the trust document permits withdrawals from the trust. Since the trustee has fiduciary power, withdrawing money for themselves would create a conflict of interest.
When making the final decision to withdraw assets from a trust for a loan, the trustee must also consider tax implications. If the beneficiary is unable to repay the loan, it could be challenged by the IRS and characterized as a distribution instead of a loan; resulting in income tax disadvantages for the beneficiary. Because of all the potential complexities involved in a trust loan, you should contact a living trust lawyer in Folsom, CA who will be able to help you and your trustee navigate any tax, collateral and documentation obstacles.
Thanks to Yee Law Group for their insight into estate planning and making a loan from a trust.