Irrevocable trust loans might not be the most talked-about topic, but they’re worth understanding if you’re dealing with real estate planning during a trust administration. In this guide, we’re going to break down everything you need to know about these loans by answering the top 10 frequently asked questions.

1. What is an irrevocable trust loan?

An irrevocable trust loan is a type of financing that allows beneficiaries of an irrevocable trust to access the assets held within the trust as collateral for a loan. Irrevocable trusts are established to protect assets and provide specific benefits to beneficiaries, and a trust loan provides a way to leverage these assets without liquidating them.

2. How does an irrevocable trust loan work?

An irrevocable trust loan works by using the real property assets within the trust as collateral. The borrower, which is the trust in this case, applies for the loan, and if approved, the lender provides funds based on the value of the trust’s real property assets. The loan proceeds are deposited directly to the trust’s bank account.

The loan will have an interest only payment due during its term. Most lenders determine a clear exit strategy in advance, typically selling the property or refinancing into a long-term loan once the property is transferred out of the trust and into the name of an individual. If the loan is not repaid, the lender can seize the assets held in the trust.

3. Who can apply for an irrevocable trust loan?

Typically, the successor trustee/s will act on behalf of the irrevocable trust to apply for the trust loan. However, eligibility criteria may vary depending on the lender’s requirements and the specific terms of the trust.

4. What are the benefits of an irrevocable trust loan?

One major benefit of an irrevocable trust loan is the ability to access liquidity without selling trust assets, which may have tax consequences or other drawbacks. Additionally, trust financing can help pay trust expenses, facilitate a sibling buyout or repair and improve the real estate prior to sale.

5. What are the requirements for obtaining an irrevocable trust loan?

The trust loan requirements can vary depending on the lender and the terms of the trust. Typically, private hard money lenders will evaluate the value and stability of the trust assets and the long-term plan for the beneficiary (future owner) to retain the property.

In addition, lenders may need documentation such as application forms on behalf of the trust, the trust agreement and either an affidavit of death of the trustee or an original death certificate.

6. Can an irrevocable trust loan be used for any purpose?

Irrevocable trust loans can generally be used for a variety of trust related purposes, such as covering trust administration expenses, property maintenance and repair, or for equalization and distribution of assets.The specific usage may vary, and will be outlined in each individual trust agreement.

7. Are there any restrictions on using the funds from an irrevocable trust loan?

While irrevocable trust loans typically offer some flexibility in how the funds are used, there may be restrictions outlined in the trust agreement. Borrowers should review the terms carefully to understand any limitations on the use of the loan proceeds.

8. How is the interest rate determined for an irrevocable trust loan?

The interest rate for an irrevocable trust loan is typically determined based on factors such as the value and equity of the trust assets, the loan amount, loan term, loan position (First vs Second), prevailing market rates, and the lender’s policies.

9. Can an irrevocable trust loan be refinanced?

Yes, borrowers may have the option to refinance an irrevocable trust loan if they can secure more favorable terms or lower interest rates. However, this is only possible once the property is transferred out of the trust and into an individual’s name.

10. Can an irrevocable trust loan be used to purchase real estate?

Yes, irrevocable trust loans can be used to purchase real estate, provided that the trust assets are sufficient to secure the loan and the lender approves the use of the funds for this purpose.

Whether you’re considering a trust loan for your estate planning needs or exploring financing options for a real estate investment, it’s important to work with lenders who understand the dynamics of trust financing. Private hard money lenders, like HCS Equity, specialize in this area, from evaluating trust assets to structuring favorable loan terms.

Get in touch with HCS Equity today to secure an irrevocable trust loan.