How loans in Trusts work

Did you know that you can lend money to the beneficiaries of a Trust?

If you are setting up a Trust as part of your legacy, you may wish to include the option for beneficiaries to borrow money from the Trust, if you don’t want them to inherit the whole estate immediately. This would be particularly effective for younger family members, who may not be as financially savvy as you might like yet.

So, how does it work?

The beneficiary approaches the Trustees to ask for a loan. And this is the perfect time for a side note here…

Choosing your Trustees wisely is crucial when you are doing your estate planning. You may wish to choose trusted family members, or you may feel they are too close to your beneficiaries and unlikely to remain objective. A family friend whose judgement you value, a professional you have a long standing relationship with – a lawyer, accountant etc, may all be very good alternatives.

Naturally, it is your decision to choose who you feel will best carry out your wishes, but please choose carefully.

So, back to asking for a loan.

The beneficiary should explain what they would like the loan for. This could be a first house purchase, supporting their education, helping them with the birth of a child, providing them with peace of mind during an illness. Ultimately it can be anything, but it would be unwise to support something that could be an ongoing concern like debt or poor habits such as gambling.

If the Trustees agree then a loan note is created. This is effectively an IOU. A legal document detailing how much is being borrowed, over what period of time, and what, if any, interest will be paid. Often in this kind of arrangement, no interest is payable, but that’s your decision.

Equally, you may well take the decision for the loan not to be repaid, but the money to be taken from your beneficiary’s estate should they pass away, this ensures the Trust stays intact for any other beneficiaries. This is for you to decide and detail in your Will/Trust set up.

There can be tax implications for loans, for the beneficiaries, so we strongly urge you to ensure the Trust is set up correctly. We would also actively encourage the beneficiaries to obtain appropriate advice before entering into the agreement.

If you would like to learn more about how loans within Trusts work, please contact us on 01344 875310.

loans in Trusts