Can You Borrow Against a Trust Fund? Rules and Options

There may come a time when you need cash while your inheritance sits in a trust, whether you’re facing a medical emergency, want to buy a home or simply need liquidity. However, accessing trust funds isn’t always straightforward. The answer to whether you can borrow against a trust fund depends on the type of trust it is, the terms of the trust document and your role in it. Below, we’ll review the rules governing trust loans and how those differ for revocable and irrevocable trusts, as well as what options exist when direct borrowing isn’t possible.

A financial advisor can review your trust documents and help you figure out whether borrowing, requesting distributions or using trust assets as collateral is an option in your situation.

Can You Borrow Against a Trust? The Short Answer

Whether you can borrow against a trust depends on three key factors: the type of trust, the trust document’s language and your role as grantor, trustee or beneficiary. Before exploring the details, understand that there are two different scenarios for borrowing: “Borrowing from the trust” means the trust itself lends money to a beneficiary; “borrowing against trust assets” means using trust-owned property as collateral for a loan from an outside lender. These are distinct paths with different rules.

Revocable trusts generally allow straightforward access. The grantor retains control and can typically use trust assets as collateral for personal loans much like they would with personally-owned property. Lenders treat revocable trust assets similarly to personal assets because the grantor maintains full control during their lifetime.

Irrevocable trusts, on the other hand, are far more restrictive. Once the grantor transfers assets into an irrevocable trust, they relinquish ownership and control. Borrowing is possible, but it requires explicit permission in the trust document and trustee approval. Most traditional banks won’t lend against irrevocable trust assets because the complex ownership structure creates uncertainty about repayment if the borrower defaults.

You cannot simply walk into a bank and use a trust fund as collateral the way you would with a personal asset. The trust’s legal structure, with its separation of legal ownership (held by the trust) and beneficial interest (held by beneficiaries), creates additional layers of complexity and restriction.

Rules That Determine Whether Borrowing Is Allowed

Whether you can borrow against or from a trust depends on several legal requirements that protect both the trust and its beneficiaries. These rules vary by trust type and state law, but certain principles apply broadly:

• The trust document is your starting point. If it explicitly prohibits loans, borrowing isn’t allowed. If the document is silent or includes language permitting lending, there may be a path forward. Many trusts grant the trustee discretionary authority to make loans under certain circumstances.
• Trustee authority must be explicitly granted. The trustee needs express or implied power to approve loans or pledge trust assets as collateral. Without this authority in the trust document, the trustee generally cannot act. Some trusts grant broad discretionary powers while others are highly specific.
• Fiduciary duty creates high standards. Trustees must act in the best interest of all beneficiaries, not just the one requesting a loan. Approving a loan to a beneficiary who can’t repay it could constitute breach of duty, potentially making the trustee personally liable.
• Impartiality among beneficiaries is required. If a trustee approves a loan for one beneficiary, they must apply consistent standards to others. Unequal treatment without legitimate justification creates legal exposure for the trustee.
• Interest rates must meet IRS minimums. Loans from a trust to a beneficiary must typically charge at least the IRS Applicable Federal Rate (AFR), which the IRS publishes monthly based on market yields of U.S. Treasury obligations. ¹
• Proper documentation is essential. Trust loans should be formalized with a promissory note including principal amount, interest rate, repayment terms, maturity date, default provisions and any collateral. This demonstrates the loan is genuine rather than a disguised distribution.
• Self-dealing is prohibited. Trustees generally cannot make loans to themselves, even if they’re also beneficiaries. Such transactions typically require court approval or unanimous consent from all beneficiaries to avoid breach of fiduciary duty claims.
• State law variations matter. Some states like Delaware have specific statutory guidance on trust lending authority, while others rely on general fiduciary principles ² . This is why it’s important to consult an attorney familiar with your state’s trust law.

How Revocable vs. Irrevocable Trusts Differ for Borrowing

The type of trust fundamentally determines how easily you can borrow against its assets. While revocable trusts offer more flexibility, irrevocable trusts come with significant restrictions.

Borrowing From Revocable Trusts

Revocable trusts offer straightforward access to funds. The grantor typically serves as both trustee and beneficiary during their lifetime. This allows them to retain the ability to access, move and borrow against trust assets as if they personally owned them.

If you own a home in a revocable living trust, for example, you can generally obtain a home equity line of credit on that property without special restrictions. Lenders treat these situations much like traditional personal loans because the grantor maintains complete control. This flexibility makes revocable trusts attractive for estate planning without sacrificing access to assets during your lifetime.

Borrowing From Irrevocable Trusts

Irrevocable trusts present a different picture entirely. The grantor has permanently relinquished ownership and control, and the assets belong to the trust itself.

Traditional banks typically refuse to lend against irrevocable trust assets because the ownership structure creates risk. This is where specialty lenders enter the picture. There are private lenders and hard money lenders who specialize in trust and estate lending and who are more willing to work with irrevocable trusts, particularly when real estate serves as collateral. However, for these loans, expect interest rates between 8% and 15%, shorter terms (often six months to three years) and frequently interest-only payment structures.

Common scenarios where borrowing from an irrevocable trust may be possible include paying estate administration expenses, buying out co-beneficiaries who want to sell inherited property or making necessary repairs to trust-owned property before a sale.

Options for Accessing Trust Funds When Direct Borrowing Isn’t Possible

When borrowing against or from a trust isn’t feasible, several alternatives may provide the access to funds you need. Each option has different requirements, costs and implications for the trust and its beneficiaries:

• Trustee discretionary distributions. Many trusts give the trustee discretion to distribute funds for health, education, maintenance and support. A distribution may be simpler than a loan because it requires no repayment. However, make sure to consider tax implications, as distributions may be taxable events.
• Hardship or emergency distributions. Some trusts include provisions allowing distributions outside the normal schedule when beneficiaries face genuine financial emergencies. The trustee must still act prudently and document the decision, but these provisions provide flexibility for unexpected needs.
• Inheritance advances or beneficiary loans. Specialized lenders offer loans to beneficiaries based on expected future inheritance. These don’t require trustee approval but carry higher interest rates and reduce what you’ll ultimately receive from the trust. This option works well when you’re waiting for trust administration to complete.
• Trust loans secured by real estate. If the trust owns real property, private lenders may lend directly to the trust using the property as collateral. These are typically short-term, higher-interest bridge loans. Often, people use them when a property needs repairs before they can sell it at full value.
• Selling trust assets for liquidity. The trustee might sell liquid assets like stocks or bonds to generate cash for distributions. This avoids taking on debt but requires consideration of tax consequences and the impact on other beneficiaries.
• Court modification or termination. If the trust’s original purpose is no longer being served, or if all beneficiaries agree the trust should be restructured, you can petition a court for modifications. This is expensive and time-consuming, but it may be appropriate in unusual situations.
• Life insurance policy loans. If the trust owns a life insurance policy with cash value, loans can be made against the policy without trustee approval beyond the initial decision. However, such loans reduce the death benefit if they are not repaid, and they accrue interest.

Risks and Considerations Before Borrowing Against a Trust

Trust loans involve significant risks that all parties should understand before proceeding. The consequences of poorly structured loans can include personal liability for trustees, family conflict and unexpected tax bills.

Risks

Breach of fiduciary duty risk looms large for trustees. Courts hold trustees to high standards and can impose personal liability even when trustees acted without malicious intent. Approving a loan that a reasonable person would view as imprudent can result in the trustee being surcharged. This means they must personally repay losses to the trust.

Impact on other beneficiaries also creates potential for family conflict and litigation. A loan to one beneficiary reduces the assets available to others. If the borrower defaults, other beneficiaries lose out directly. Trustees must carefully balance the interests of the beneficiary requesting the loan against the interests of other beneficiaries.

Default and foreclosure risk becomes real when trust real estate secures a loan. If the borrower defaults, the property could be foreclosed upon, and the trust loses an asset that may have been specifically intended for certain beneficiaries. This can also affect the stepped-up basis benefits that beneficiaries would have received at the grantor’s death.

Lastly, bankruptcy complications arise if a beneficiary who borrowed from the trust later files for bankruptcy. Courts have addressed situations where trusts become unsecured creditors in bankruptcy proceedings, with limited ability to recover the loan.

Other Considerations

The tax consequences of borrowing from or against a trust fund can be substantial and complex. The IRS can recharacterize below-market interest rates as taxable distributions. Further, loan proceeds used improperly may create additional tax issues. There are potential income tax, gift tax and estate tax implications depending on the structure of the loan.

Borrowing from a trust comes with costs. Interest payments, origination fees and other charges reduce the overall value of the trust, which affects what is eventually passed to beneficiaries. If the loan is not repaid, the trust loses even more, which could conflict with what the grantor originally intended when they set it up.

Professional advice matters immensely because trust lending involves overlapping legal, tax and fiduciary considerations that vary by state. An estate planning attorney should review any proposed loan arrangement, and a tax advisor should analyze the consequences. While this advice costs money upfront, the cost of mistakes—including personal liability for trustees or unexpected tax bills—can be far greater.

Bottom Line

Borrowing against a trust fund is possible in many situations, but it depends on whether the trust is revocable or irrevocable, what the trust document permits and applicable state law. Revocable trusts typically allow straightforward access, while irrevocable trusts face restrictions that often require specialty lenders. Before pursuing a trust loan, consider whether a distribution makes more sense, and evaluate the tax consequences and the impact on other beneficiaries. Given the legal and tax issues involved, working with an estate planning attorney and tax advisor can help you avoid costly mistakes.

Estate Planning Tips

• A financial advisor can review your trust structure and help you weigh whether borrowing, taking a distribution or using another approach makes the most financial sense given your tax situation and the impact on other beneficiaries. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• While it may be tempting to save some money and plan your estate by yourself, you should still be careful with these DIY estate planning pitfalls.

Photo credit: ©iStock.com/David Gyung, ©iStock.com/William_Potter, ©iStock.com/Jinda Noipho