Can a Trustee Borrow Money From a Trust?

When a grantor puts money into a trust, the grantor will also appoint a trustee to oversee the maintenance and distribution of the trust's funds. The trustee acts as a fiduciary over the trust, and his main responsibility is to make sure the money in the trust is carefully invested and properly distributed to beneficiaries. While trust documents may permit beneficiaries to take loans from the trust as a type of distribution, the trustee himself cannot take or borrow money from the trust, as it creates a conflict of interest.

A trust is created when someone, often called the grantor or the settlor, takes money or property and designates it as belonging to the trust, which is its own separate legal entity. Trusts are often created to set aside funds for minor children to provide them with support, while limiting their access to it until they're responsible enough to manage their own money. Other times, trusts are created simply as an estate-planning mechanism to avoid estate taxes. Either way, a trust is a way of setting aside assets, including money, for the benefit of someone else, who is the beneficiary. To protect the beneficiary's interests, a trustee is appointed to administer the trust.

First and foremost, the trustee is a fiduciary. This means when it comes to the trust, he has to place the needs of the trust beneficiaries above his own needs. He is responsible for the trust's assets, which belong to the trust and not to the trustee personally. He is responsible for managing the trust and investing the trust assets in a prudent manner so that they earn interest, and he is responsible for following the instructions in the trust document to the letter. He cannot mix the trust funds with his own money, and he cannot take money from the trust for his personal use, even if he intends to pay it back. In some circumstances, the trustee is also a beneficiary, which means he must take extra care with the trust assets to avoid using them as a personal piggy bank.

A trust document may provide that the trust can make loans to the beneficiaries. If the trust documents do not specifically state that loans are permitted, the trustee cannot make any loans from the trust assets. If loans are permitted, the trustee must follow formal procedures to make the loan, just as she would for making regular distributions, and execute any documents necessary to effectuate the loan. Furthermore, the trustee isn't required to make a loan just because a beneficiary asks for it. The trustee will need to review the beneficiary's ability to pay, just as a bank making a loan would do, and the trustee may, in fact, deny the request for a loan. If the trustee is also a beneficiary, they should still not loan herself money from the trust, even if the documents permit loans. They are the fiduciary of the trust, and loaning themselves money could create a conflict of interest.