Can A Trustee Loan Money To A Trust

Trust agreements ofttimes give trustees the power to make loans. When and how to practise the power should be given significant thought. Upholding the fiduciary duty owed to all beneficiaries is always a central concern. Consideration of revenue enhancement implications, due diligence and documentation are essential.

LOANS TO BENEFICIARIES

A loan taken from a trust can exist skillful for the beneficiary or the beneficiary'south business organisation and can be an alternative to making an outright distribution to the beneficiary. In determining whether to brand a loan to a beneficiary, the trustee should consider the post-obit:

The trustee should kickoff determine whether the trust agreement (and non merely a trust certification) permits the trustee to loan coin. If prohibited, the trustee may non brand the loan.
If permitted, proper internal procedures, like to those for making an outright distribution to a beneficiary, should be followed and documented.
Once it has been adamant that the trustee has the authority to make a loan to a beneficiary, and subsequent to the trustee'southward proper exercise of its discretion to make such loan, the collateral security requirements of the loan must be considered by the trustee. A beneficiary may benefit from relaxed collateral security requirements for the loan, as standard commercial lending criteria may be modified to suit the needs of the beneficiary. Nevertheless, the trustee should ensure that there is sufficient collateral for the loan, as the loan will be a trust nugget and may be scrutinized for proper portfolio direction by the beneficiaries or a court having jurisdiction over the trust.
The ability of the casher to repay the loan must also be considered. If the trustee knows that the beneficiary will be unable to repay the loan, the loan could be challenged by the IRS and may be re-characterized as a disguised distribution to the beneficiary, which could cause an adverse income tax result for the casher.
Although Congress has eliminated the revenue enhancement advantages of interest-free loans, a trust loan with a beneath-market place interest rate can be an bonny and viable financing option for a casher. Provided the trustee complies with sure rules prescribed by the IRS pertaining to adequately stated involvement, the trustee could make up one's mind to brand a loan to a trust casher in order to accommodate the needs of the casher. For example, Rev.Rul. 2015-03 contains the minimum required interest rates for loans made in Apr 2015 and provides for (i) a short term rate for demand loans and loans with terms of up to three years equal to 0.48%; (ii) a mid-term rate for loans from 3 to 9 years equal to 1.70%; and (iii) a long-term rate for loans over 9 years equal to 2.47%. These rates are significantly lower than rates that would be commercially available to the casher and, in full general, may exist used to the do good of the beneficiary without an adverse income tax result.
Finally, all loans made to a trust beneficiary should be supported by appropriate documentation, such as a promissory note, and, if necessary, a collateral security agreement.

Repayment of a loan from a trust can be fabricated from money the casher might otherwise have been entitled to receive from the trust, or trustees tin can brand loan payments on behalf of the beneficiary. The specific language of the trust and the powers expressly conferred upon the trustees make up one's mind these issues. Because of the pregnant fiduciary obligations associated with making a loan to a beneficiary, and because the IRS may carefully examine the loan transaction to make up one's mind the advisable tax treatment to the trust and the beneficiary, the trust loan transaction should be carefully considered and documented by the trustee and its counsel. McNees attorneys have the fiduciary, tax and lending experience to help corporate fiduciaries navigate and document the complexities of trust loan.

LOANS TO TRUSTS

Sometimes the trustees of a trust may need or want to borrow money to preserve or make improvements to trust assets. Other times, trustees may determine that it is in the best interest of the trust beneficiaries to refinance property held in trust. In order to make sure such loans are permissible and are properly authorized, and the lending instruments are properly documented and executed, the trust agreement (and non only a trustee certification) should exist reviewed by lender's counsel. For case, the standard power of a trustee to borrow money solitary is non sufficient to validly pledge or encumber trust avails. Additionally, the Truth in Lending Act and other consumer protection statutes may be applicable in some cases. Loans to trusts are generally not qualified for resale on the secondary market. McNees attorneys can guide you through all aspects of the process of lending to trusts.

Source: https://www.jdsupra.com/legalnews/the-trustees-power-to-loan-84926/

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