Trusts are widely utilized estate planning tools that help manage and distribute assets to beneficiaries. In California, as in other states, trustees are appointed to manage the trust and act in the best interests of the beneficiaries.
A common question that arises is whether a trustee can borrow money from the trust. It is essential to clarify that, for our purposes, the trustee is not actually borrowing from the trust. Instead, the trust itself is borrowing from a lender and using trust property as collateral. The trustee’s role is to act on behalf of the trust during the loan process.
In this post, we will dive into the subject of trust loans in California, discussing the circumstances under which a trust may borrow money and the reasons why a trustee might seek a loan on behalf of the trust.
Understanding the Function of a Trust
A trust is a legal entity created by the trustor (also known as the grantor). The trustor transfers their assets and property into the trust and appoints trustees to manage the trust for the benefit of the beneficiaries.. Property can include money, cars, houses, and other assets.
In California, trusts must have the following basic elements: a creator of the trust (the trustor/grantor), a manager of the trust (the trustee or fiduciary), a person who will receive property from the trust (the beneficiary), and property ¹.
Trustee’s Fiduciary Duty
A trustee is responsible for holding and managing property for the benefit of the trust’s beneficiaries. Because of the enormous power placed in trustees, they are bound by a set of rules called fiduciary duties.
Fiduciaries are individuals who are trusted to act on behalf of someone else by putting that person’s best interests ahead of their own. The law considers a fiduciary duty to be the highest standard of responsibility one can exercise.
In California, trustee fiduciary duties include the duty to put the beneficiaries’ interests above one’s own and to avoid self-dealing. The trustee must gather and guard trust property, managing it prudently and carefully to protect it for the beneficiaries. If the trustee doesn’t safeguard it and, instead, acts recklessly with it, he can be sued by the beneficiaries for breach of duty.
Why a Trustee Would Want or Need to Borrow Money Against the Trust Assets
A trustee holds a vital position within a trust, as they are entrusted with managing and preserving the trust’s assets for the benefit of its beneficiaries. In order to fulfill their fiduciary duties, a trustee may find themselves in need of additional funds. There are a multitude of reasons why a trustee would want or need to borrow money against the trust assets, all with the ultimate goal of ensuring the trust’s objectives are met and the beneficiaries’ interests are served.
In California, a trustee may choose to borrow against trust assets for several reasons. One reason may be to pay for deferred maintenance on a trust-owned property. Deferred maintenance refers to repairs or upkeep that have been postponed, often due to budget constraints. By borrowing against trust assets, a trustee may be able to finance necessary repairs and upkeep to maintain the value of the property.
Preparing a Property for Sale
Another reason a trustee may choose to borrow against trust assets is to prepare a property for sale. Preparing a property for sale may involve making repairs, staging the property, and other expenses. By borrowing against trust assets, a trustee may be able to finance these expenses and maximize the sale price of the property.
Facilitate a Sibling Buyout
A trustee may also choose to borrow against trust assets to facilitate a sibling buyout. A sibling buyout occurs when one beneficiary buys out the interests of other beneficiaries in a trust-owned property. By borrowing against trust assets, a trustee may be able to provide the necessary funds for one beneficiary to buy out the interests of other beneficiaries.
Distribute Income or Assets
Finally, a trustee may need to borrow money in order to distribute income or assets to beneficiaries as required by the terms of the trust. This ensures that the beneficiaries receive their rightful share in a timely manner, which is a key aspect of a trustee’s fiduciary duty. It is important to note that a trustee must always act in accordance with the terms of the trust and in the best interest of the beneficiaries when making decisions about how to use trust funds. By securing the necessary funds through borrowing against trust assets, a trustee can effectively fulfill their duties and ensure the financial stability and longevity of the trust.
Conditions for Borrowing Money from a Trust:
Loans to an irrevocable trust are possible under three general conditions, provided that the trust and property are both located in California:
- First, real property held in the trust can be used as collateral for the loan.
- Second, the successor trustee must approve the loan.
- Third, consent from the beneficiaries must be obtained. Additionally, the trust documents must explicitly permit trustees or beneficiaries to acquire a loan using trust property as collateral.
To properly loan money to a Trust, a Trustee needs to act carefully and take a few extra steps.
The Trustee has two choices when entering into transactions with the Trust. They can either
- obtain consent from the beneficiaries, have their attorney write an opinion letter referencing the specific section of the trust giving the trustee to act independently,
- or obtain permission from the court.
HCS Equity Works with Trustees
It is important for trustees to carefully consider their actions and ensure that they are acting in accordance with their fiduciary duties and the terms of the trust.
A non-traditional, specialty hard-money lender like HCS Equity can work with you to help you get the loan you need to fulfill your financial duties. Get started on understanding your trust loan requirements with our help today.