Borrowing Against Trust Assets

I recently received a frantic call from Vincent. He’d meticulously crafted a Revocable Living Trust fifteen years ago, funded it with his home, brokerage accounts, and a small rental property. He now needed capital for his daughter’s medical bills, and his bank suggested a loan against the trust. He was thrilled – until the bank demanded full trustee authority, potentially jeopardizing his control and the entire estate plan. This scenario, unfortunately, is becoming increasingly common, and highlights a critical misunderstanding about trust assets and borrowing.

Can a Trustee Take Out a Loan Against Trust Assets?

Yes, a trustee can borrow against trust assets, but it’s rarely straightforward and carries significant risks. It’s not like a homeowner taking out a HELOC. Typically, a trustee doesn’t have the inherent right to incur debt on behalf of the trust. The trust document itself must specifically authorize such borrowing, outlining the conditions and limitations. Without that explicit language, the trustee is engaging in potentially breaching their fiduciary duty.

What Types of Loans Are Possible?

Several options exist, each with its own complications:

• Trust Line of Credit: Some banks offer specialized lines of credit secured by the trust’s assets. These are difficult to obtain and typically require stringent underwriting.
• Personal Loan (with Trustee Guarantee): Vincent’s scenario. The trustee takes a personal loan, pledging trust assets as collateral. This puts the trustee’s personal credit at risk and, critically, may require court approval.
• Non-Recourse Loan: A loan secured by trust assets where the lender cannot pursue the trustee personally if the trust defaults. These are exceptionally difficult to secure and carry high interest rates.

As a CPA as well as an attorney with over 35 years of experience, I’ve seen countless instances where seemingly simple loan requests spiral into complex legal battles. The key is meticulous documentation and adherence to the trust’s terms. Furthermore, understand that the eventual distribution of assets, like real property, will be subject to reassessment. While transferring your home into your revocable trust does not trigger reassessment, the eventual distribution to your children will trigger a Prop 19 reassessment to current market value unless the child moves in as their primary residence within one year.

What About Digital Assets and RUFADAA?

In today’s world, trusts often hold digital assets—cryptocurrency, online accounts, photos. Without specific RUFADAA language (Probate Code § 870) in your trust, service providers like Apple, Google, and Coinbase can legally deny your successor trustee access to these crucial assets, regardless of any borrowing arrangements. This oversight can negate the entire purpose of a trust-based loan.

What if Assets Weren’t Properly Funded?

It’s shockingly common for clients to create a trust document but fail to fully fund it. Signing the trust document is only step one—you must legally transfer assets (funding) to the trustee for the trust to exist – under California Probate Code § 15200. If a key asset, like a primary residence valued up to $750,000, was accidentally left out, and the settlor dies on or after April 1, 2025, don’t assume you’re facing full probate. You can now utilize a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151) – a streamlined process initiated with the court. This is a Petition (Judge’s Order), not an Affidavit, and the distinction is critical.

The Impact of the OBBBA on Estate Tax Planning

While borrowing against trust assets can be tempting, it’s important to consider the broader estate planning context. Effective Jan 1, 2026, the OBBBA permanently set the Federal Estate Tax Exemption to $15 million per person, meaning the primary focus of most Living Trusts is now avoiding probate and protecting privacy, rather than minimizing federal taxes. Borrowing could unintentionally complicate this goal.

Ultimately, borrowing against trust assets should be a last resort. A thorough review of the trust document, a careful assessment of the risks, and consultation with legal and financial professionals are essential. As your attorney and CPA, I always prioritize preserving the long-term integrity of your estate plan.

What determines whether a California trust settlement remains private or erupts into public litigation?

California trusts are designed to bypass probate and maintain privacy, yet they often fail when assets are not properly funded, trustee duties are ignored, or ambiguous terms trigger disputes. Even with a signed trust document, families can face court battles if the “operations manual” of the trust isn’t followed strictly under the Probate Code.

California trust planning is most effective when the structure is matched to the specific family goal and assets are fully funded into the trust name. When administration is handled with transparency and adherence to the Probate Code, the trust can fulfill its promise of privacy and efficiency.

Verified Authority on California Trust Law

• Trust Validity (Probate Code § 15200): California Probate Code § 15200
  The foundational statute confirming that a trust requires property to be valid. This is the legal basis for the “funding” requirement—without transferring assets (deeds, accounts) into the trust, the document is legally empty.
• Revocability Presumption (Probate Code § 15400): California Probate Code § 15400
  Confirms that California trusts are presumed revocable unless stated otherwise. This grants the settlor the flexibility to change beneficiaries, trustees, or terms as life circumstances evolve.
• Primary Residence Succession (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute acts as a backup for funding errors. If a home (up to $750,000) is left out of the trust, this Petition avoids a full probate administration.
• Property Tax Reassessment (Prop 19): California State Board of Equalization (Prop 19)
  Essential for all trust creators. While the trust avoids probate, it does not automatically avoid property tax increases for heirs. Specific planning is required to navigate the “primary residence” requirement for children.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). This shifts the planning focus for most Californians from tax avoidance to asset protection and probate avoidance.
• Digital Asset Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without this statutory authority included in your trust, your digital legacy (crypto, social media, cloud storage) may be permanently locked away from your family by service providers.