A trust is one of the most popular options when it comes to estate planning. A trust is essentially an agreement for a third party to hold a set of possessions until certain conditions are met. If a trust is being used for estate planning, the condition will be the death of the one who created the trust, then the contents of the trust will be distributed to those who were initially designated. Sometimes a trust comes with an additional condition that the contents will not be given until those who would receive the contents reach a certain age. A common question that comes up is whether loans can be taken from the trust early.
Whether you are in the process of creating a trust and want to know if your loved ones can take loans out on it, or you are going to receive from a trust soon but need funds now, this guide will provide you with the information you need.
It is important to understand the parties involved in a trust. The person who initially creates the trust is called the benefactor. The person or people eventually receive the contents of the trust are called beneficiaries. The person who watches over the trust in the meantime is called the trustee. It is important that the trustee is not also a beneficiary, or else that would create a conflict of interest.
It is possible for a beneficiary to take out a loan on a trust, assuming the benefactor specified that it was possible. If no information about loans is given by the benefactor, it defaults to no loans being possible. The benefactor can also stipulate that no loans should be made.
The general rule is that the trustee has absolute power over whether a loan should be taken out or not. The trustee usually will evaluate how reliable the beneficiary requesting a loan is, in much the same way a bank would when a loan application is filled. The trustee can decide to deny the loan based on the beneficiary seeming to be irresponsible or not having enough assets. Likewise, the taxes of the loan are to be considered carefully. If the loan is being taken out to fund a business, it may be tax-deductible, which would make the loan more appealing. The trustee should always be someone who can make these kinds of financial decisions with expertise. If you are planning a trust, you should keep this in mind when choosing a trustee.
Contact an estate planning lawyer, like an estate planning lawyer in Gilbert, AZ, for more information on trusts or to help you create one.
Thanks to Citadel Law Firm for their insight into whether a beneficiary can take out a loan on a trust.