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.
This article covers important irrevocable trust loan questions, including:
- What is a trust loan?
- The benefits of trust loans to beneficiaries
- Lending money to an irrevocable trust
- Why might a bank refrain from giving irrevocable trust loans?
- What are irrevocable trust loan lenders?
- How can a beneficiary get a loan from a trust?
- Mortgage refinancing with irrevocable trust loans
- Can an irrevocable trust guarantee a loan?
- Avoiding property tax reassessment – Proposition 58 & 193 Loans
- How does Proposition 19 affect irrevocable trusts?
As a private irrevocable trust loan lender, HCS Equity can provide capital to your trust and make funds available in as little as 7-10 days.
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.
- Help pay for the expenses of the trust: Beneficiaries are responsible for paying the financial expenses of the trust once the original trustees have passed. These expenses could include property taxes, mortgage payments, maintenance and repairs, and legal fees. One way to cover these financial burdens is by selling trust assets. Another, faster option is taking out a trust loan.
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.
Why might a bank refrain from giving irrevocable trust loans?
There are a few reasons why larger, traditional banks might refuse to lend money to irrevocable trusts. Firstly, irrevocable trusts are not something that the secondary market will buy, so banks tend not to be interested in lending to them.
A second reason is that bank loan officers don’t usually have the knowledge or experience to deal with irrevocable trusts and therefore don’t feel comfortable issuing trust loans.
The third most common reason banks may avoid irrevocable trust loans is that these trusts have asset protection that most lenders prefer not to deal with. Finally, bigger banks tend to focus more on investment banking, and don’t have the services or expertise to handle issuing an irrevocable trust loan.
What are irrevocable trust loan lenders?
When bigger banks refuse to provide a loan to irrevocable trusts, trustees and beneficiaries can turn to trust loan lenders. Irrevocable trust loan lenders are private money lenders that have short-term financing available for irrevocable trusts.
As the capital for these lenders comes from private investors rather than large banking institutions, they can help you secure financing much more quickly.
Financing options vary by lender, but some can make the loan available for up to three years. It’s most common, however, to write a loan for 12 months and pay it off much sooner. At HCS Equity, we present flexible underwriting and terms for trust loans to help fit the needs of our clients.
How can beneficiaries get trust loans?
Beneficiaries of an irrevocable trust can get a trust loan, but they must follow a certain process.
- The beneficiary must get approval from the successor trustee before taking out a trust loan.
- The beneficiary contacts an irrevocable trust loan lender to start the loan application process.
- The beneficiary typically must fill out forms detailing their personal financial information.
- The successor trustee usually must complete a form with information pertaining specifically to the trust and the real estate serving as collateral for the trust loan.
- The beneficiary and successor trustee submit their application for approval.
- The private lender reviews the application and if it is approved, the beneficiary can have the funds in as little as 7-10 days.
Mortgage refinancing with irrevocable trust loans
A common question among beneficiaries and trustees is whether an irrevocable trust can get a mortgage. It is possible to refinance a mortgage with an irrevocable trust if you go to a specialized trust lender.
These irrevocable trust loan lenders can help successor trustees and beneficiaries easily distribute assets and determine the loan amount required to equalize the trust. The lender then provides private capital directly to the trust to create the needed liquidity for equalization. This step is crucial because it helps avoid tax reassessment.
This mortgage refinancing process is only for short-term loans that assist with trust distribution. Once the title transfer is complete and the property is in the beneficiary’s name and no longer part of the trust, the beneficiary should then contact a traditional mortgage lender to refinance the short-term trust loan into a long-term loan.
Can an irrevocable trust guarantee a loan?
An irrevocable trust cannot guarantee a loan because technically, a borrower cannot serve as a guarantor for their own debts. An individual can guarantee the debts of another borrower, however, and an irrevocable trust can provide real estate assets as collateral for a loan.
How does Proposition 19 affect irrevocable trusts?
Proposition 19 passed in California in 2020, repealing Propositions 58 and 193. Using Prop 58 and 193 loans to avoid property tax reassessment after a transfer may not be possible in some cases any longer, as a result of the new rules put in place by Prop 19. The new law applies to transfers that take place after February 15, 2021, and Props 58 and 193 apply to transfers that took place before February 15, 2021.
When it comes to irrevocable trusts, it’s hard to say exactly how Proposition 19 affects them because each trust differs. You should speak with the attorney who set up the trust for more information. You can also visit our Proposition 19 resource page to learn more about how this new rule affects property transfers in California and feel free to contact us with your questions.
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.
Irrevocable trust loans in California
HCS Equity provides capital to a trust to facilitate the equalization of distribution to heirs. We provide a smooth transfer of assets from one generation to the next. With competitive interest rates and terms for each loan applicant, no required down payment, no prepay penalties, and no minimum months of interest, HCS Equity trust loans can make your transfer process easier.