The general concept of a trust is relatively simple – a formal arrangement where a party (trustor) assigns control of their property or assets to a second-party (trustee) on behalf of a third-party (beneficiary).
A trust can either be revocable or irrevocable. A revocable trust simply means the trustor can change or terminate the terms and conditions of the trust at any time. In contrast, an irrevocable trust cannot be changed. Once set up, the property, beneficiaries, and terms and conditions are fixed. Once the trustor passes away, a revocable trust automatically becomes irrevocable.
There are instances when it may be beneficial for an irrevocable trust to obtain additional capital. This is where a trust loan comes in. Loans to trusts in California can offer benefits to trusts, trustees, and beneficiaries.
What is a trust loan?
A trust loan is a loan offered typically by specialized private lenders directly to an irrevocable trust. This type of loan utilizes property from the trust as collateral. To take out a trust loan, trust documents must permit trustees to use trust property as collateral for the loan.
Conventional lenders, such as banks and credit unions, are reluctant (or in most cases unable) to offer loans to irrevocable trusts in California. This reluctance is partly due to the complexity, lack of personal guarantee, as well as the hassle to set up this loan. Private lenders, like HCS Equity, fill this gap for beneficiaries and trustees looking for liquidity in their trust.
As we’ll see, an irrevocable trust can seek a loan for a variety of reasons.
How does a trust loan benefit beneficiaries?
There are a couple of key benefits trust loans offer to beneficiaries:
- Beneficiary buyout: During the equalization process, if one (or more) of the beneficiaries decide they no longer want to keep their ownership stake of the property, a trust loan allows for a buyout. The trust loan provides liquidity to the trust to make the necessary non pro rata distribution to the beneficiary seeking cash while permitting the other beneficiaries to retain ownership of the property from the irrevocable trust.
- Avoiding property tax reassessments: During the equalization process (also known as buyout), beneficiaries can take out a private trust loan, which then allows them to file for the Proposition 58 exclusion from reassessment. Proposition 58 excludes this type of transfer from tax reassessments when a transfer occurs between parents to their children, saving beneficiaries thousands of dollars on property tax.
Lending Money to an Irrevocable Trust
Lending money to an irrevocable trust is possible under three general conditions:
- Real property held in the trust are used as collateral for the loan
- Successor trustee must approve of the loan, and the beneficiaries must give consent
- Trust documents must allow for trustees or beneficiaries to acquire a loan using trust property as collateral
Most major banks and credit unions will not lend money to an irrevocable trust. They would generally require the property in the irrevocable trust to be sold off because a property cannot simply be removed from the trust to facilitate the loan.
In contrast, HCS Equity provides loans directly to irrevocable trusts using our own capital through a quick review & approval process. If approved, funds can be available within 7-10 days in most cases.
The trustee will initiate this loan, and either the trustee or a beneficiary will be responsible for paying off or refinancing the loan once the property has been transferred from the trust into the beneficiary retaining the property’s name.
Avoiding Property Tax Reassessment – Proposition 58 & 193 Loans
In California, Proposition 13 limits the annual hikes in property tax assessment value to 2%. However, transfers of property between one party to another will trigger a tax reassessment. This reassessment applies when parents or grandparents transfer their property to their children, resulting in hefty property taxes.
To avoid the property tax reassessment, the beneficiary retaining the property can file for the Proposition 58 exclusion from reassessment. A Prop 58 loan is a trust loan taken out against real estate assets within the trust. It essentially excludes property within the trust from a reassessment when parents transfer their property to their children in accordance with the Board of Equalization loan.
Likewise, a qualifying transfer between grandparents to children is exempt from a reassessment through a Proposition 193, and a private trust loan will help facilitate the equalization and distribution process.
Claims for both Prop 58 and 193 are not automatic, and need to be made within three years from the date of the transfer.