Can a Personal Loan Be Issued by a Legal Trust?
There are many different types of trusts, and the specific agreement determines whether personal loans are available for disbursement from trust assets. The trustee reviews the trust agreement upon request for a personal loan, and determines whether the disbursement can occur under those terms.
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Revocable Grantor Trust
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The grantor of a revocable trust retains power over the assets and is the owner of the trust for legal and purposes. A revocable trust grantor has the right to make a personal loan to an individual, but must be careful to structure the personal loan properly. If the personal loan is at an interest rate that is below normal market conditions, then gift tax can apply for the amount of interest not charged.
Irrevocable Trust
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A grantor that is still alive and has set up an irrevocable trust has relinquished ownership of the assets. Many trust agreements contain language in the trust agreement specific to personal loans, in that the trust cannot lend to trust beneficiaries. If a beneficiary requests a personal loan, the trustee of the irrevocable grantor trust completes a review of the trust agreement and determines if loan funds are available for disbursement. Even though the grantor is still alive, he does not have power over whether personal loan proceeds disburse. The same applies for irrevocable trusts where the grantor is no longer alive.
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Investment Lending
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Most trusts contain boilerplate legal language that allows the trustee to lend, but this is specifically for investment purposes with the intent of providing a beneficial investment return to the trust. Professional trustees do not typically pursue these types of loans because of the inherent risk in lending, and beneficiaries often confuse this language in that it gives the trustee the ability to make personal loans.
Options
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A trustee will deny any personal loan request if the trustee believes the risk of repayment is high. If a trust beneficiary is seeking a personal loan from an irrevocable trust, he should review the trust agreement to see if there is language in the trust agreement that allows principal disbursements from the trust that meets his need for funds. The trustee would consider the request and review the trust agreement to determine if principal distributions can disburse under the trust terms.
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