When considering financial vehicles for the transfer of assets, most financial experts believe a trust to be the best tool. While a trust does not make sense for every individual, those with considerable wealth with have a hard time finding a more financially beneficial tool for their descendants and loved ones. Unfortunately, the management of a trust is complicated, especially when a trustee wishes to make a loan to a beneficiary. Before diving into the possibility of beneficiary loans, it is necessary to understand the option and why it may be beneficial.
The Fundamentals of Lending
In some cases, a trust can provide a loan to a beneficiary against their potential inheritance. However, not every trust will allow such an exchange. You will need to review the trust agreement to see if loans are expressly prohibited. If nothing is restricting the use of loans, then you can likely provide a loan to a beneficiary. However, the lending process can be somewhat complicated, which means you may wish to speak with an attorney before loaning money.
Reasons to Loan Rather Than Distribute
While many trusts may allow early distributions to beneficiaries, offering a loan instead ensures the continued value of the trust. When a recipient can learn how to maintain the capital of the trust through repayment, it is likely they will continue to see long-term gains. Short-term loans help to preserve the assets over distribution. You may also choose to loan because the trust agreement prevents the early distribution of assets. Despite the early distribution restrictions, it is often still possible to provide a loan.
How To Loan Through a Trust
If there are no restrictions on making a beneficiary loan, then you may loan directly through the trust. However, some trusts are set up in such a way that direct loans are not possible. If you cannot provide a direct loan, the beneficiary may work with a hard money lender, using the trust as collateral for the loan. Unfortunately, if the trust assets are only made up of non-liquid assets, like real estate, a hard money loan may not be possible through the beneficiary. A lender still may work with the trust directly. The loan will then be made through the trust, with the trust acting as an intermediary, loaning the money to the beneficiary.
Beneficiary loans are often possible through a trust, but they can be complicated. If you are interested in discussing the possibilities of such a loan, then contact a trust fund lawyer, like the Yee Law Group for a consultation.