What is a Trust?
A trust is a legal document used in estate planning. The person creating the trust, called the grantor, sets aside assets to be managed by a trustee. After the grantor dies, the trustee distributes the assets to the beneficiaries according to the grantor’s instructions. For example, if you want to leave a piece of property to your adult daughter, but you don’t want her to receive it until she’s 40 years old, you might use a trust to accomplish this.
Can I Make a Loan to a Beneficiary from My Trust?
In some cases, the short answer is yes; you can make a loan to a beneficiary out of a trust. After all, the assets are for the benefit of the beneficiary eventually anyway. Beneficiaries can realize significant advantages to their businesses or personal finances by taking a loan against a trust. However, trust documents vary, and some explicitly prohibit lending. If you are establishing a trust, make sure your wishes are clear on this subject. If you want to allow loans to beneficiaries, you may wish to include appropriate financial controls to ensure that the loan is made correctly and documented thoroughly. You may also want to include criteria to assess the beneficiary’s ability to repay the loan.
Here are a few reasons why you might want to make a loan to a beneficiary from a trust:
- Loans get repaid to the trust, so in that way, a loan is better than just giving the beneficiary the money outright. The beneficiary receives the short-term benefit of the funds without depleting the capital of the trust.
- Some trust documents forbid early distributions, leaving loans as the only way for a beneficiary to access the money.
- You may be able to offer the beneficiary better terms than traditional lenders if the trust has enough liquid assets. If this is not possible, a beneficiary may get a loan through another type of lender by using the trust as collateral.
Where Can I Learn More?
If you have questions about creating a trust, or if you already have a trust and want to know if you can make a loan to a beneficiary from it, you should seek out a knowledgeable and experienced trust lawyer in your area. State laws on trusts vary, so it’s essential to ensure that yours is established following all local rules.