Can You Borrow Money Against a Trust?

Can You Borrow Money Against a Trust?
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Whether you can borrow money against assets owned by a trust, or anticipated payments from it, depends on how it was set up. In some cases, trusts are set up with so-called spendthrift provisions saying this isn't allowed. You can also sometimes borrow money from a trust, presuming it's allowed by the trust's rules and approved by its administrators.

Tips

  • Your rights and privileges with regards to borrowing money from a trust are entirely dependent upon the specific set of rules established by the grantor at the time the trust is created. If a trustee considers this type of lending to be not in the best interests of the trust, they have the right to prohibit such activities.

Understanding Trust Rules

A trust is generally set up when someone known as a grantor or settler establishes it according to certain rules and provides certain assets to it, usually with the help of expert lawyers. Administrators known as trustees manage the assets for the benefit of specified people, called beneficiaries. In some cases, the initial grantor serves as trustee until passing away.

Grantors have considerable leeway in setting up the rules for their trusts. They often do so in order to ensure a future for their relatives after they pass away and often to minimize inheritance and income taxes. Trustees are generally obliged to follow these rules, as well as the law, and to make prudent investment decisions for the good of the beneficiaries.

Establishing Borrowing Limits

Grantors are allowed to set limits on how beneficiaries spend and borrow against trust funds. These are sometimes called spendthrift provisions, since they're designed to prevent people from squandering away their inheritances. Depending on what these rules say, beneficiaries may or may not be able to borrow against trust funds and their expected future payouts from the trust. For example, a trust may allow a beneficiary to borrow money for specific types of expenses, such as educational or medical costs.

In some cases, the trustee may also be able to borrow against trust assets on behalf of the trust. For example, the trustee may be able to mortgage a trust-owned property in order to get money to improve it as an investment or for the use of the beneficiaries.

Borrowing From the Trust

In some cases, a beneficiary needing a loan may be able to borrow from the trust itself. Again, whether this is allowed, what terms may apply and how it needs to be approved and documented by the trustees depends on the rules set up when the trust is created.

Trustees generally have to make fiscally prudent decisions on behalf of a trust, which may prevent them from lending to a beneficiary who is unlikely to be able to repay a loan or lending without a minimal amount of interest or collateral. This may especially be true if there are multiple beneficiaries, some of whom may be harmed by making an unsound loan to one of them.