Getting a loan can be an effective way for a trust to access funds, but the process is more complicated than it may seem. In this comprehensive guide, we’ll explain everything you need to know about trusts getting loans, including the different types of trusts, lenders, loan purposes, and steps involved.
Overview of Trusts and Loans
A trust is a legal entity that can hold assets separate from the original owner for the benefit of designated beneficiaries. There are two main types of trusts – revocable and irrevocable.
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Revocable trusts can be changed or terminated by the grantor who created it. They can often get traditional loans relatively easily.
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Irrevocable trusts cannot be changed once created. They have more limited loan options but can get specialized trust loans.
Trusts may want loans for various reasons, like:
- Accessing funds for beneficiaries without distributions
- Making improvements to trust properties
- Equalizing asset distribution between beneficiaries
- Helping beneficiaries purchase property while keeping it in the trust
Can a Revocable Trust Get a Loan?
Also called living trusts, revocable trusts can generally get traditional mortgage loans from banks and lenders. The process is similar to an individual getting a mortgage.
Here are some key points on revocable trust loans:
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The trust creator/grantor must be alive for the trust to qualify for a traditional loan.
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The trustee simply signs the loan documents on behalf of the trust.
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Loan qualification is based on the trust assets income, and the trustee’s creditworthiness.
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Interest rates may be slightly higher than personal mortgages but still competitive.
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Loan amounts, terms, and property types are similar to personal mortgages
As long as the trust is active with a living grantor, getting a mortgage loan through a revocable trust is usually straightforward. The lender will just need to verify the validity of the trust and trustee.
Can an Irrevocable Trust Get a Loan?
Once a revocable trust becomes irrevocable after the grantor passes away, traditional lenders are no longer willing to provide loans. This is because an irrevocable trust cannot be easily changed or terminated.
However, irrevocable trusts can get specialized trust loans from private lenders. Here are some key points:
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Interest rates are higher than traditional loans but still reasonable for trusts.
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Loan amounts are based on the equity in the property – usually up to 65-75%.
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Terms are shorter than traditional loans, typically 6-12 months.
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Fast funding is possible, often within 1-2 weeks.
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Security and collateral depend on the trust property and beneficiaries.
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Beneficiaries or trustees apply and sign on behalf of the trust.
Though limited, trust loans provide irrevocable trusts access to reasonable financing. The trust deed and loan documents simply remain in the trust’s name.
What Lenders Provide Trust Loans?
Given the complexities involved, only specialized lenders provide loans to irrevocable trusts. Here are the main options:
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Private lenders – Also called hard money lenders, they lend based on the real estate. Quick funding but very high rates.
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Trust loan companies – Specialize specifically in trust loans with better rates/terms than private lenders.
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Mortgage brokers – Some have access to trust loan programs but options can be limited.
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Family members – Direct private loans from relatives may be possible but can get complicated.
Trust loan companies tend to offer the best combination of reasonable rates, customized loan structures, and efficient processes. They also have expertise in trust lending requirements.
What are Some Common Purposes for Trust Loans?
There are several scenarios where trusts may need loans for specific objectives, including:
Trust Beneficiary Buyouts
- A loan can help one beneficiary buy out another’s interest in a property held by the trust, allowing them to take full ownership.
Preventing Reassessments
- In some states, transferring property from a trust to a beneficiary triggers reassessment. A loan avoids this.
Making Improvements
- Loans allow trusts to finance repairs or upgrades to trust-owned properties before sale.
Purchasing Assets
- Loans can fund the trust’s purchase of assets like real estate for investment purposes.
Estate Equalization
- Loans help trustees equalize asset distribution between beneficiaries.
Loans provide flexibility for trustees to handle a variety of situations in beneficiaries’ best interests.
What is the Process for a Trust to Get a Loan?
The loan process will vary slightly depending on the lender, but involves these general steps:
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Determine the loan purpose, amount needed, and preferred terms.
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Research lenders and choose one that fits the trust’s needs.
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Submit loan application and trust documents for lender review.
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Provide details on the trust property that will serve as collateral.
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Lender evaluates and approves the loan based on factors like equity, trustee credit, and eligibility.
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Loan documents are prepared detailing interest rates, terms, security details, etc.
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Trustee signs on behalf of the trust once the loan is approved.
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Lender disburses funds to the trust within a few days to weeks.
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Trustee makes payments until the loan is repaid in full.
Though the process involves some additional steps compared to personal loans, trust loans provide a valuable funding option.
Tips for Getting a Trust Loan
Navigating trust loans can be complex, so here are some tips:
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Review the trust deed to ensure loans are allowed and follow any stipulated guidelines.
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Consult with a trust attorney and CPA to evaluate the implications.
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Shop different lenders to compare loan options and find the best fit.
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Prioritize trust loan companies over private lenders for better rates/terms.
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Seek loan amounts in line with the equity percentage lenders will approve.
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Opt for shorter 6-12 month terms until assets are distributed from the trust.
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Have beneficiaries sign acknowledgements of any loans received to avoid issues.
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Document every detail of the loan for trust records and proper tax treatment.
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Consider all distribution options in addition to loans for the optimal result.
With careful planning and expert guidance, trusts can tap loans as a strategic financial tool to benefit heirs.
Frequently Asked Questions
Can an irrevocable trust get a mortgage?
No, irrevocable trusts cannot get traditional mortgages from banks. Only private trust loans are available.
How quickly can a trust get a loan?
For private trust loans, funding can often be obtained in 1-3 weeks. Timeframe depends on factors like the lender, loan amount, and property.
Do trust loans have to be paid back?
Yes, trust loans are legitimate loans that must be repaid just like any other loan. Terms are laid out in the loan documents.
Can you borrow from an irrevocable trust as a beneficiary?
Beneficiaries can borrow from a trust if allowed by the trust terms and handled properly. There are tax implications to avoid.
Who makes the decision on trust loans?
It depends on the trust structure. Often a distribution or investment trustee has authority for loans to beneficiaries.
The Bottom Line
Getting a loan for a trust isn’t as simple as individual financing, but is certainly possible. Revocable trusts can access traditional mortgages, while irrevocable trusts can obtain specialized private trust loans. Following proper guidelines and procedures is key to ensuring trust loans are executed smoothly and legally. With the right lender and loan structure, trusts can leverage loans just like individuals for a variety of purposes.
Living or Revocable Trust Loan
A trust can get a mortgage or loan from a traditional lender if the trust is considered a living or revocable trust. The original trustee who created the trust would still need to be alive for the trust to obtain the traditional mortgage or loan. Getting a mortgage on a property held in a trust is usually straightforward. The trustee would just need to sign for the loan as the trustee of the trust.
When the original trustees of the trust have passed, the living or revocable trust becomes an irrevocable trust. Once the trust becomes irrevocable, no changes can be made to the trust . The successor trustee(s) named in the trust are now able to act on behalf of the trust. Trusts typically allow for successor trustees to encumber assets of the trust (obtain a loan) but traditional lenders will not lend against a property that is currently owned by an irrevocable trust.
The traditional mortgage lender will likely require that the property is taken out of the irrevocable trust in order to provide the loan. The property would have to be transferred from the irrevocable trust into the name of an individual before the traditional lender would be able to consider providing a loan against the trust-owned property. If there is only one beneficiary of the trust this should be possible but things are complicated when there is more than one beneficiary.
Can a Trust Borrow Money?
Can a trust get a mortgage or a loan? A trust can borrow money depending on the type of the trust and if the trust allows for loans being placed against the trust-owned property. The majority of trusts do allow for a mortgage or loan to be placed against real estate owned by the trust. There are many different types of trusts, but many trusts fall into the category of either living/revocable trusts or irrevocable trusts. If the inherited real estate was not within a trust it would likely be within an estate which would require the administrator/heirs to obtain a probate loan.