When property is held in a trust, questions often arise about whether that trust can borrow money or take on a mortgage. The short answer is yes—a trust can borrow money, but only if permitted by the trust’s governing document and under the authority of the trustee. Because trusts are legal entities, they can hold, sell, or finance assets much like individuals, though the process involves more oversight and legal requirements.
Borrowing through a trust is often necessary when heirs or trustees need liquidity for estate expenses, property buyouts, or refinancing existing debt. However, not all trusts function the same way. The ability to borrow depends on the trust’s type—revocable or irrevocable—and the powers granted to the trustee. Understanding these distinctions is crucial to ensure the loan is structured legally and in the best interest of all beneficiaries.
Can a Trust Borrow Money from a Bank?
Yes, some trusts can borrow money from a traditional bank, but the process is often more complex than a standard mortgage. Banks will review the trust agreement to confirm that the trustee has the power to encumber or borrow against the trust’s assets. The trustee must provide documentation—such as trust certificates, resolutions, or notarized statements—showing their authority to act on behalf of the trust.
However, many banks are hesitant to lend directly to trusts, especially irrevocable trusts, because they can be restrictive and difficult to modify. If a trust doesn’t allow borrowing or the trustee’s powers are limited, banks may decline the loan. In these cases, specialized hard money lenders or private estate lenders—such as California Hard Money Lender—can step in to provide short-term financing that aligns with trust regulations, allowing trustees and beneficiaries to access funds more efficiently.
Who Pays the Mortgage on a House in a Trust?
When a property is held in a trust, the trust itself is responsible for paying the mortgage, but the actual payments are made by the trustee using funds from the trust’s assets. If the trust holds cash or investment income, those resources can be used to cover monthly loan obligations. In the case of a revocable living trust, the grantor (who created the trust) often continues making payments as they did before transferring the property into the trust.
After the grantor’s death, the trustee may continue payments until the estate is settled or the property is refinanced or sold. For irrevocable trusts, payments depend on how the trust is structured—some are funded with income-producing assets, while others require outside financing. The key is that the trustee must always act in accordance with the trust’s terms, ensuring any mortgage obligations are managed responsibly and transparently.
Living or Revocable Trust Loan
A revocable living trust loan is one of the more straightforward forms of trust financing because the trust’s creator (grantor) retains full control over the assets. Since the grantor and the trust are legally connected, lenders often treat the transaction similarly to a standard mortgage. This makes it easier to refinance or obtain a line of credit against property held in a living trust, as long as the trustee—often the grantor themselves—has clear authority to act.
Borrowing within a revocable trust can simplify estate planning by allowing assets to stay within the trust while still accessing needed liquidity. Homeowners use these loans for renovations, debt consolidation, or even to support retirement income. Once the grantor passes away and the trust becomes irrevocable, however, new restrictions apply—making it essential to understand how control and flexibility change over time.
Irrevocable Trust Loan
An irrevocable trust loan is more complex because assets in these trusts cannot be easily modified, borrowed against, or distributed without following specific legal conditions. The trustee must adhere to the trust’s written terms, and not all irrevocable trusts permit borrowing. When borrowing is allowed, it is typically to resolve estate matters such as buying out beneficiaries, paying estate taxes, or preventing the forced sale of property.
Since banks often avoid lending to irrevocable trusts, borrowers usually turn to specialized private estate lenders familiar with these unique structures. These lenders can provide short-term bridge loans secured by the trust’s property, distributing funds through the estate or trust itself. Once the property title is transferred to a beneficiary or heir, the short-term loan can be refinanced into a traditional mortgage—allowing the trust to close out its obligations smoothly.
Mortgage Loans to Irrevocable Trusts
Mortgage loans to irrevocable trusts require careful coordination between the trustee, the lender, and the estate’s legal team. The trustee must demonstrate that the loan benefits all beneficiaries and aligns with the trust’s purpose—such as maintaining property ownership, avoiding liquidation, or distributing assets fairly. Transparency is key: all beneficiaries should be informed of the transaction and its implications for the trust’s value.
Private and hard money lenders often lead the way in this niche. They can tailor loan terms to fit the trust’s specific legal framework and time constraints. These trust-secured loans are especially valuable when liquidity is needed quickly, such as during estate settlements or property transfers. By working with experienced lenders who understand fiduciary lending, trustees can meet the trust’s obligations without disrupting its long-term goals.
IMPORTANT NOTE
This article provides general educational information only and should not be taken as financial, legal, or tax advice. Rules governing trust loans vary by state and by the trust’s specific terms. Always consult a qualified attorney, trustee, or financial professional before structuring or authorizing any loan involving trust assets.