Lending to an irrevocable trust

4 Replies

I'm actually a banker and had a trust attorney stump me yesterday. He asked why banks do not lend anymore to irrevocable trusts and I knew the answer was "no" (at least at the ones I've worked for) but didn't really know the "why." My underwriter gave the answer that technically the trust is the owner of the collateral but the trustee is who we would have to go after therefore it's basically an unsecured loan so we stay away. My question is - if that's true why can you potentially do a revocable trust loan? Wouldn't that be the same issue? Or is it just banks have gotten more conservative, possibly because this went to court and someone lost so all steer clear of them now.

Hi @Adam Odom - Interesting topic, and one that I've dealt with regularly in estate planning matters. At its essence, an irrevocable trust agreement is a 'completed gift,' or to say it another way, the grantor/settlor has fully, finally and forever release ownership of the property they are transferring into the trust. Thus, recourse against the grantor/settlor is virtually impossible because they don't own, and are therefore not responsible for, trust liabilities (except in cases where the government wants a pound of flesh, of course). However, when dealing with a revocable trust, you have an 'incomplete gift,' that is to say that the grantor/settlor can, at any time, reverse the transaction and take back the trust property, and therefore remains liable for trust obligations. This is a major oversimplification, but I hope it helps clear up the issue to some degree!

Great clarification! I hate telling people no without a good reason or alternative. I appreciate the feedback.

@Adam Odom

I've seen banks make loans to irrevocable trusts but only under exceptional circumstances and for substantial trusts (say $50 million and above). I would think that one of the main issues is that not all irrevocable trusts are the same. That's especially true for these large trusts that attorneys spend a substantial number of hours drafting. Thus if the bank wants to lend to these entities, they will need to do a lot of due diligence on the bank's end to make sure that they have recourse in case of a default. 

I'm not sure if it gets done for smaller trusts. Maybe it does but I haven't run across it. 

Disclaimer: While I’m an attorney licensed to practice in PA, I’m not your attorney. What I wrote above does not create an attorney/client relationship between us. I wrote the above for informational purposes. Do not rely on it for legal advice. Always consult with your attorney before you rely on the above information.

@Chris K. Yeah I know even for revocable trusts they have to run through our legal department. The trust attorney I relayed the information to mentioned REITs and was curious why they can "borrow" compared to others. I'm guessing they are normally revocable? I know just enough to be dangerous with trusts and rely on experts like you and @Andrew A. :)

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