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Richard
Richard, Attorney
Category: Estate Law
Satisfied Customers: 54021
Experience:  29 years of experience practicing law, including tax and estate planning.
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I am the primary trustee for a Family Trust and a Special

Customer Question

I am the primary trustee for a Family Trust and a Special Needs Trust for 4 handicapped adults in California. The Family Trust owns a house free and clear. It is the only asset in the trust. There are no assets in the Special Needs Trust. The title of the house is in my name, as trustee for the Family Trust.
My brother, who is listed as the secondary trustee (in case I die or become incapacitated), wants me to apply for a loan (possible HELOC) against the house and have me loan it to himself as a personal loan for him to use as a down payment on a personal house that he is planning on buying. He will repay the loan.
There is a clause in the Family Trust allowing for loans. The entire section reads “The trustee shall have the power to loan money to any person, including a trust beneficiary or the estate of a trust beneficiary, at prevailing interest rates and with or without security as the trust deems advisable.” That is all the is mentioned about loans in the entire trust.
I have some questions:
1) Is it legal for a trustee to borrow money from a trust that he is managing?
2) If not, what are the consequences for proceeding with a loan?
2) If so, I assume that I would have to personally qualify for a loan. Is that correct?
3) He suggested that if I am not comfortable with doing this loan that I should step down and let him take over as trustee so he could do the loan as the primary trustee. Is this possible? How would I step down?
5) If I step down and he goes through with the loan and it does turn out to be illegal, do I hold any liability?
6) Are there any pitfalls/concerns that I not thinking of?
Submitted: 4 months ago.
Category: Estate Law
Expert:  Richard replied 4 months ago.

Hi. My name is ***** ***** I will be helping you today! It will take me just a few minutes to type a response to your question. Thanks for your patience!

Expert:  Richard replied 4 months ago.

As a trustee, this is fraught with peril for you because if he doesn't repay the loan, you do run a high risk of being sued by the other beneficiaries. Given the language, you do have the legal right to do that; BUT, just because you have the authority doesn't mean you should do it because under the trust code you have a fiduciary duty to the beneficiaries. So, you wouldn't want to make a loan that you wouldn't make to a third party and if your brother can't get this loan on his own, it tells me his credit is not great. Thus, you put yourself in peril by making a loan a bank wouldn't make. At the very least, you should get all the other beneficiaries (or their guardians if they are not competent) to consent to this action so that you don't have to worry about them suing you for breach of fiduciary duty. You'll have to pledge trust assets to get the loan if you do it through the trust. If I couldn't get the beneficiaries to all agree, I would not do this if I was in your shoes.

Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as Good or Excellent (hopefully Good or Excellent). Otherwise, I receive no credit for assisting you today. I thank you in advance for taking the time to provide me a positive rating!

Expert:  Richard replied 4 months ago.

I just wanted to let you know that I have a dinner engagement this evening. Should you have a follow up while I’m away, I will address it immediately upon my return. Thank you in advance for your patience. I apologize for any inconvenience.

Customer: replied 4 months ago.
The beneficiaries are mentally handicapped and incapable of giving an informed consent. They wouldn't understand. They are functioning at about a 5-8 year old.
Customer: replied 4 months ago.
What about the other questions?
Customer: replied 4 months ago.
The beneficiaries are mentally handicapped and would have no idea what this is bout. They wouldn't have the ability to give an informed consent.
JA: Because laws vary from state to state, could you tell me what state is this in?
Customer: California
JA: Have you talked to a lawyer yet?
Customer: I thought I was. I responding to a response.
JA: Anything else you think the lawyer should know?
Customer: Is this the person who responded to my question
Expert:  Richard replied 4 months ago.

Customer

I am the primary trustee for a Family Trust and a Special Needs Trust for 4 handicapped adults in California. The Family Trust owns a house free and clear. It is the only asset in the trust. There are no assets in the Special Needs Trust. The title of the house is in my name, as trustee for the Family Trust.
My brother, who is listed as the secondary trustee (in case I die or become incapacitated), wants me to apply for a loan (possible HELOC) against the house and have me loan it to himself as a personal loan for him to use as a down payment on a personal house that he is planning on buying. He will repay the loan.
There is a clause in the Family Trust allowing for loans. The entire section reads “The trustee shall have the power to loan money to any person, including a trust beneficiary or the estate of a trust beneficiary, at prevailing interest rates and with or without security as the trust deems advisable.” That is all the is mentioned about loans in the entire trust.

I have some questions:
1) Is it legal for a trustee to borrow money from a trust that he is managing?
2) If not, what are the consequences for proceeding with a loan?
2) If so, I assume that I would have to personally qualify for a loan. Is that correct?
3) He suggested that if I am not comfortable with doing this loan that I should step down and let him take over as trustee so he could do the loan as the primary trustee. Is this possible? How would I step down?
5) If I step down and he goes through with the loan and it does turn out to be illegal, do I hold any liability?
6) Are there any pitfalls/concerns that I not thinking of?

4 Aug 2016, 5:30 PM

Me

Hi. My name is ***** ***** I will be helping you today! It will take me just a few minutes to type a response to your question. Thanks for your patience!

4 Aug 2016, 5:32 PM

Me

As a trustee, this is fraught with peril for you because if he doesn't repay the loan, you do run a high risk of being sued by the other beneficiaries. Given the language, you do have the legal right to do that; BUT, just because you have the authority doesn't mean you should do it because under the trust code you have a fiduciary duty to the beneficiaries. So, you wouldn't want to make a loan that you wouldn't make to a third party and if your brother can't get this loan on his own, it tells me his credit is not great. Thus, you put yourself in peril by making a loan a bank wouldn't make. At the very least, you should get all the other beneficiaries (or their guardians if they are not competent) to consent to this action so that you don't have to worry about them suing you for breach of fiduciary duty. You'll have to pledge trust assets to get the loan if you do it through the trust. If I couldn't get the beneficiaries to all agree, I would not do this if I was in your shoes.

Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as Good or Excellent (hopefully Good or Excellent). Otherwise, I receive no credit for assisting you today.I thank you in advance for taking the time to provide me a positive rating!

4 Aug 2016, 5:37 PM

Me

I just wanted to let you know that I have a dinner engagement this evening. Should you have a follow up while I’m away, I will address it immediately upon my return. Thank you in advance for your patience. I apologize for any inconvenience.

4 Aug 2016, 5:49 PM

Customer

The beneficiaries are mentally handicapped and incapable of giving an informed consent. They wouldn't understand. They are functioning at about a 5-8 year old.

4 Aug 2016, 6:01 PM

Customer

What about the other questions?

4 Aug 2016, 6:01 PM

Customer

The beneficiaries are mentally handicapped and would have no idea what this is bout. They wouldn't have the ability to give an informed consent.
JA: Because laws vary from state to state, could you tell me what state is this in?
Customer: California
JA: Have you talked to a lawyer yet?
Customer: I thought I was. I responding to a response.
JA: Anything else you think the lawyer should know?
Customer: Is this the person who responded to my question

4 Aug 2016, 6:26 PM

Me

Thanks for following up. I think most of your other questions are answered in my response, but I'll be happy to address each question individually.

1) Is it legal for a trustee to borrow money from a trust that he is managing? Given your trust language, yes, it is legal.
2) If not, what are the consequences for proceeding with a loan? Although legal, that doesn't mean that doing so isn't a breach of fiduciary duty if you make a loan that a reasonable person wouldn't make given the facts.
2) If so, I assume that I would have to personally qualify for a loan. Is that correct? If you are doing this through a trust, either the trust assets would have to be pledged or you would have to be personally liable on the note.
3) He suggested that if I am not comfortable with doing this loan that I should step down and let him take over as trustee so he could do the loan as the primary trustee. Is this possible? How would I step down? Yes, you could step down, but this would not likely be in the best interests of the beneficiary. The trust assets are not the personal piggy bank of the trustee; and here he's clearly looking out for his interests; not the beneficiaries.
5) If I step down and he goes through with the loan and it does turn out to be illegal, do I hold any liability? You do not.
6) Are there any pitfalls/concerns that I not thinking of? I think I've covered all the issues.

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