---
title: Careful Planning Required For Beneficiaries to Borrow From a Trust
description: Trust Loans, Family Loans, Arms-Length Transaction, Disguised Distributions
image: https://blog.sweeneyconrad.com/hubfs/Family%20Loan%20from%20Trust.jpeg
---
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# Careful Planning Required For Beneficiaries to Borrow From a Trust
By Melanie Abigania and Jessica Simons | Apr 25, 2022
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Intrafamily loans allow you to provide financial assistance to loved ones — often at favorable terms — while potentially reducing gift and estate taxes. But what about families that lack the liquid assets to make such loans? Are there other options if they have a trust?
One lesser-known possibility is for trust beneficiaries to borrow money from a trust. This strategy requires careful planning, however, because the trustee must consider his or her fiduciary duty to the trust and its other beneficiaries in approving and structuring such a loan.
**Benefits of intrafamily loans**
An intrafamily loan can be a great way to help out your children or other family members financially while also transferring significant amounts of wealth, free of gift and estate tax. Why not simply make an outright gift? Actually, a gift is the better option, so long as your unused exemption is enough to cover it and you don’t need the funds or the interest income. But if transfer taxes are an issue or you’re not prepared to part with the money just yet, a loan can be an attractive alternative.
Generally, to pass muster with the IRS, the interest rate on an intrafamily loan must be at least the applicable federal rate for the month in which the loan is made. Otherwise, the IRS may view the loan as a disguised distribution, which can result in a variety of unpleasant tax complications. The loan should also be documented by a promissory note and otherwise treated as an arm’s-length transaction.
**Trust loans vs. distributions**
If an intrafamily loan isn’t an option, it may be possible for a trust beneficiary to obtain a loan from the trust. You might wonder why a beneficiary would borrow from the trust rather than take a distribution. There are several situations in which a loan may be necessary or desirable, including:
- The trust’s terms place conditions on distributions that aren’t currently satisfied,
- The borrower seeks an amount that exceeds limits on distributions imposed by the trust (an income-only trust, for example),
- The trust has multiple beneficiaries and the borrower seeks an amount that would be unfair to other beneficiaries if taken as a distribution, or
- A loan is preferable for tax planning purposes.
Be sure to check whether trust loans are permissible. Many trust instruments explicitly authorize loans.
**Handle with care**
There’s a critical difference between intrafamily loans and trust loans: The trustee has a fiduciary duty to manage the trust in a prudent and impartial manner. If you lend money to family members from your personal assets, you’re generally permitted to structure the transaction as you see fit.
However, a trustee considering a loan request must act in the best interests of the trust and all of its beneficiaries. So, for example, a trustee who approves a loan to a current beneficiary who’s a bad credit risk is likely breaching his or her fiduciary duty to the remainder beneficiaries.
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