Can a trustee loan money to a trust? There are times when a Trust may be land-rich, but cash-poor. Or maybe the Trust owns a business, financial investments, or any other type of asset that cannot be easily sold. How does the Trustee pay bills and expenses when there is no cash to pay from?
At times, a Trustee will loan money to the Trust to fund payment of expenses. This happens most often when the Trustee is also a Trust beneficiary. While the Trustee may think they are doing the Trust a favor, there are a number of pitfalls for Trustees who loan money to a Trust.
Avoiding Conflicts of Interest
For starters, every Trustee has a duty to avoid conflicts of interest (see Probate Code section 16004). If the Trustee loans money to a Trust and expects to be paid interest (the way it works with borrowing money from a bank), then there will be problems. Any transactions between the Trustee and the Trust is automatically a violation of the Trustee’s duty to avoid conflicts of interest. A Trustee must remain neutral and impartial; loans are neither.
To properly loan money to a Trust, a Trustee needs to act carefully and take a few extra steps. The Trustee has two choices when entering into transactions with the Trust. They can either (1) obtain consent from the beneficiaries, or (2) obtain permission from the court.
The Role of the Beneficiary
Beneficiaries can consent to the actions of a Trustee before the action occurs under Probate Code section 16463. Once a beneficiary consents, the beneficiary cannot later sue the Trustee for breach of Trust. There are two exceptions, however, to consents protecting a Trustee. First, if the beneficiary lacks capacity at the time of signing the consent, then the consent is invalid. Second, if the beneficiary is not aware of his or her rights and was not provided with all known material facts by the Trustee, then the consent is invalid. As you can see, a consent can be tricky because a beneficiary can later argue that a material fact was not disclosed.
Seeking a court order is a more time consuming, and expensive, solution. But a court order provides finality to the issue. Once the court issues an order authorizing the transaction, then the beneficiaries cannot later sue the Trustee over that transaction.
The bottom line: Trustees must be careful when loaning money to a Trust. It is not so easy as just paying for Trust expenses or transferring money into a Trust bank account. There are issues that should be disclosed and discussed with the beneficiaries before any loan takes place.