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Most people think about estate and trust administration as simply dividing up a loved one’s assets after their deaths. But life is complicated and sometimes personal representatives and trustees face complicated financial situations. Other times, beneficiaries may face financial struggles before or after their loved one’s death that can affect their inheritance. It is important for personal representatives and trustees to know how to deal with loans against inheritance or a trust in keeping with their fiduciary duties.
An inheritance loan is taken from a lender (though often not a bank), based on the expectation that you will repay the loan once you receive the anticipated inheritance. When the deceased’s assets are distributed by the probate court, the lender takes repayment with interest. An inheritance loan can allow beneficiaries quick access to a portion of their inheritance to pay for debts, funeral costs, and other expenses, but it often comes with high interest rates and penalties for non-payment.
However, it is important to know that a deceased’s dependents have other options besides an inheritance loan to pay for such things. If a person dies without making reasonable provision for their dependents (such as through life insurance), the person’s spouse or dependents can file a claim with the Florida probate court to receive a Florida family allowance while the case is pending. That money is not an inheritance advance and does not come out of the dependents’ share unless the deceased’s Last Will and Testament says otherwise.
If the deceased’s assets were placed in a trust – either a revocable living trust or a testamentary trust created upon their deaths – the beneficiaries of that trust may be able to borrow from the trust itself. Florida law gives trustees the authority to make loans out of trust property, including loaning property to a trust beneficiary, as long as the terms and conditions on the loan, and the obligation to repay it, are fair and reasonable. However, this power can be limited by the specific language of the trust documentation. The deceased may restrict the uses of beneficiary loans, the amounts, frequency, or other timing based on her wishes for the property. For example, a grantor (the person making a trust) may allow beneficiaries to take out loans for their education or to pay off student loans, but not to purchase a new car.
Even if the trust documentation allows for beneficiary loans, the trustee is not required to grant every request. Trustees are bound by their fiduciary duty to act impartially and in the best interest of all the trust’s beneficiaries. If it appears that a loan to one beneficiary will negatively affect the others’ interests, or that the borrower will not be able to repay the trust on time, the trustee may be legally required to deny the request.
Because a trustee has fiduciary duties of impartiality and prudent administration of the trust, they generally are not allowed to take out inheritance loans against the trust for their own benefit, even if they are also a beneficiary. A beneficiary of an irrevocable trust generally cannot use his or her trust as collateral because of a spendthrift clause. However, trustees may sometimes take loans against trust assets for the benefit of the trust or its beneficiaries.
Remember that it is the trustee’s job to manage and preserve the trust’s assets for the benefit of its fiduciaries. However, particularly when the trustee takes control of an elderly person’s trust assets, the property within the trust may not be in the best condition. The trustee may need to take a loan against the family home, for example, to repair the roof or update the fixtures. This will allow the property to maintain its value (and even appreciate in value), until it can be distributed to the beneficiaries.
Sometimes, especially in a testamentary trust, the purpose of a trust is not to preserve assets indefinitely, but rather to distribute them to the beneficiaries once certain conditions are met. Depending on the language of the trust documents, this may require liquidating trust assets. But if a vehicle is in need of repair or a home needs to be staged before they can be sold, the trustee may need to borrow against the trust’s assets to prepare the property for sale.
Often, a grantor may tell a trustee (or personal representative under a Will), that they intend their children to inherit equally. But siblings may not be interested in remaining joint tenants on family property forever. In trying to avoid sibling rivalry and resolve disputes between beneficiaries, a trustee may choose to borrow against trust assets to liquidate funds to allow one beneficiary to buy out the interests of another beneficiary in the trust’s assets.
A trustee is required to act according to the terms of the trust documentation to distribute the trust assets according to the grantor’s wishes. Sometimes, ensuring each beneficiary receives their rightful share requires some financial creativity. If permitted by the terms of the trust documents, the trustee may borrow against trust assets to distribute trust income or assets to the beneficiaries, while maintaining the long-term financial stability of the trust principle.
Honoring a trustee’s fiduciary duty to maintain and preserve trust assets and serve the beneficiaries’ needs can be a complicated process. Beneficiaries and heirs may have financial demands that will not wait for a full administration of their loved one’s estate. At Harrison Estate Law, P.A., our experienced estate and trust litigation attorneys understand the challenges in balancing beneficiaries’ needs with the trust’s long-term health. We can help trustees and beneficiaries find financial solutions that help them meet their goals and honor their fiduciary duties. Contact us here or call 352-559-9828 to get help today.
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