Can you borrow money from a trust?

A trust is a legal entity consisting of a donor/founder, trustees and beneficiaries. The founder holds assets (without owning them) for the benefit of the trust beneficiaries.

A trust beneficiary is entitled to benefit under the trust arrangement, from vested or discretionary rights determined by the trust deed. Beneficiaries of a trust are usually natural persons, but may also be a juristic person, such as a company. All trusts must have ascertainable beneficiaries.

All in all, a trust is used to set aside assets, including money, for the benefit of someone else, who is the beneficiary. To protect the beneficiary’s interests, a trustee is appointed to administer the trust.

It may be stated in the trust deed that the trust can make loans to the beneficiaries. If the deed does not specifically state that loans are allowed, the trustee cannot make any loans from the trust assets. If loans are permitted, the trustee must follow formal procedures to make the loan, just as he/she would for making regular distributions and utilise any documents necessary to bring the loan into effect.

Furthermore, the trustee isn’t required to make a loan simply because a beneficiary asks for it. The trustee will need to review the beneficiary’s ability to pay, just as a bank making a loan would do, and the trustee may deny the request for a loan. If the trustee is also a beneficiary, they should still not loan themselves money from the trust, even if the deed permits loans. They are the fiduciary of the trust and loaning themselves could create a conflict of interest.

In some instances, a beneficiary needing a loan may be able to borrow from the trust. Whether this is allowed, what terms may apply, and how it needs to be approved and documented by the trustees depends on the rules set up when the trust is created.

Trustees generally have to make financially sensible decisions on behalf of a trust. They owe a legal duty to administer assets strictly according to the terms of the trust for the sole benefit of the trust beneficiaries.

As such, this may prevent them from lending to a beneficiary who is unlikely to be able to repay a loan, or lending without a minimal amount of interest or collateral (property or other assets that a borrower offers a lender to secure a loan). This may likely be the case if there are multiple beneficiaries, some of whom may be negatively affected by making an unsound loan to one of them.