Financing Real Estate: Mortgage Options for Irrevocable Trusts
By G. David Lapin On February 13 2024
Can an Irrevocable Trust Take Out a Loan in California?
The basic principle of a trust is quite straightforward - it's a formal arrangement where one party, known as the trustor, transfers control of their assets or property to another party, the trustee, for the benefit of a third party, the beneficiary.
Trusts can be either revocable or irrevocable. A revocable trust allows the trustor to make changes or revoke it entirely at any time. Conversely, an irrevocable trust cannot be altered once established. Its terms and conditions, along with the assets and beneficiaries, are set in stone. Upon the trustor's death, a revocable trust automatically becomes irrevocable.
There are situations where it might be advantageous for an irrevocable trust to secure additional funds. This is where trust loans come into play. In California, loans to trusts can provide various benefits to trustees and beneficiaries alike.
What Exactly is a Trust Loan?
A trust loan is a type of loan typically arranged by specialized hard money mortgage broker to an irrevocable trust that is funded by trust deed investors. These loans use assets from the trust as collateral. However, it's essential for the trust documents to authorize trustees to utilize trust assets as collateral for such loans. The beneficiaries named on the trust will need to be notified of the new loan to be.
Traditional lenders like banks and credit unions are often hesitant, if not unable, to offer loans to irrevocable trusts in California due to the complexity involved, the absence of personal guarantees, and the procedural hurdles. Private mortgage financing, such as those offering equity solutions, step in to fill this void for beneficiaries and trustees seeking liquidity within their trusts.
Let's delve into how an irrevocable trust can benefit from securing a loan.
Benefits of Trust Loans for Beneficiaries:
Facilitating Buyouts: In scenarios where beneficiaries wish to relinquish their ownership stakes in the property during the equalization process, trust loans enable a buyout. These loans provide liquidity to the trust, allowing for non-pro rata distributions to the beneficiaries seeking cash, while permitting others to retain ownership of the property held within the irrevocable trust.