Can I Borrow Against Assets During Litigation

I recently spoke with Emily, a woman facing a nightmare scenario. Her brother, David, was contesting their mother’s trust, claiming undue influence over the final months of her life. Emily needed funds to cover legal fees – and quickly. She wanted to borrow against the family ranch, a key asset in the trust, but her lender was hesitant, citing the pending litigation. “They said the lawsuit clouds the title and makes it too risky,” she explained, nearly in tears. “Now I’m facing mounting bills and could lose my ability to defend against David’s baseless claims.” Emily’s situation is tragically common. Clients often find themselves in a financial vise grip when litigation arises, desperately needing liquidity but blocked by the very assets that could provide it.

What Happens When a Lawsuit Affects Asset Liquidity?

The core problem is lender reluctance. Banks and lending institutions understandably shy away from assets entangled in legal battles. A lien or encumbrance on property subject to a lawsuit introduces significant risk: the lender could be swept into the litigation, face delays in recovering their funds, or even lose priority if a court orders the asset to be sold to satisfy a judgment. This isn’t about the merits of the case; it’s about the uncertainty. However, options do exist, and navigating them requires a nuanced understanding of California law and lender policies. As an Estate Planning Attorney and CPA with over 35 years of experience, I’ve guided countless clients through these complex situations, leveraging my financial background to find creative solutions.

Can a Trustee Borrow Against Trust Assets During Litigation?

Borrowing on behalf of a trust during active litigation is particularly tricky. Trustees have a fiduciary duty to act in the best interests of the beneficiaries, but taking on debt could diminish the trust’s value. Generally, a trustee can borrow against trust assets, but only if it’s demonstrably prudent and authorized by the trust document. They’ll need to secure court approval, especially if the debt will be used to fund ongoing litigation expenses. If the trust document doesn’t explicitly permit borrowing, the trustee may need to petition the court for instructions, which can be time-consuming and costly. Furthermore, any loan agreement must disclose the litigation, and the lender may demand a higher interest rate or stricter collateral requirements.

What About Beneficiaries Seeking Loans on Assets in Trust?

Emily’s situation highlights a common issue. A beneficiary wanting to borrow against an asset held in trust faces an even steeper climb. The trustee isn’t legally obligated to cooperate, and most won’t unless it benefits the trust as a whole. The lender will likely require the trustee’s consent or, failing that, a court order. This often involves a complex negotiation or, in the worst-case scenario, a separate legal action to compel the trustee’s cooperation. A crucial consideration here is the potential impact on the litigation itself. If the loan creates a new creditor with a claim against the asset, it could complicate the resolution of the lawsuit.

How Does a Petition Under AB 2016 Affect Lending?

For disputes involving real property, especially family homes, the implementation of AB 2016 (Probate Code § 13151) is a game changer, but it creates a parallel lending challenge. Prior to April 1, 2025, disputes over property not held in trust often required a lengthy and expensive Heggstad Petition, essentially a full probate trial to determine ownership. AB 2016 streamlined this process for smaller estates, but it also introduces a new layer of complexity for lenders. While a ‘Petition for Succession’ under AB 2016 is faster than a Heggstad trial, lenders may still be hesitant to extend credit on property subject to a Petition. They’ll want assurance that the Petition will be resolved quickly and that their lien will be protected. It’s critical to distinguish this “Petition” (a Judge’s Order) from a simple “Affidavit.”

What Role Does a CPA-Attorney Play in These Situations?

My dual background as an attorney and CPA is invaluable in these scenarios. Beyond navigating the legal hurdles, I can analyze the financial implications of borrowing, assess the potential tax consequences (particularly the impact on step-up in basis and capital gains), and negotiate with lenders to secure favorable terms. Understanding asset valuation is paramount. For example, if David argues the ranch was undervalued in the trust, a thorough appraisal is essential to protect both Emily’s interests and the lender’s collateral. I can also help explore alternative financing options, such as litigation funding or short-term bridge loans, always prioritizing the long-term preservation of the estate.

What Happens If a Beneficiary Contests the Trust?

If a beneficiary actively contests the trust, the landscape shifts dramatically. The trustee’s powers are further constrained, and the risk to lenders increases. The potential for a prolonged legal battle and the possibility of the trust being overturned create a high degree of uncertainty. Under Probate Code § 21311, a “No-Contest Clause” is only enforceable if the challenger brought the lawsuit without probable cause; simply suing the trustee does not automatically trigger disinheritance. Moreover, if a care custodian is named as a beneficiary in a trust amendment drafted during their service, Probate Code § 21380 creates a presumption of fraud, shifting the burden of proof entirely onto them. Lenders will scrutinize these factors carefully before extending credit. And, increasingly, access to crucial evidence relies on RUFADAA (Probate Code § 870), without which subpoenaing digital communications like emails or texts – often vital to proving undue influence – may be legally blocked.

Ultimately, borrowing against assets during litigation is rarely straightforward. It demands a proactive, strategic approach, a deep understanding of California law, and a skilled advocate to protect your interests. Don’t wait until your finances are critical. Early planning and consultation can prevent a liquidity crisis from derailing your legal strategy.

What causes California trust administration to fail due to poor funding, vague terms, or trustee misconduct?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

Ultimately, the success of a trust depends on the details—proper funding, clear terms, and a trustee willing to follow the rules. By anticipating friction points and documenting every step of the administration, fiduciaries can protect the estate and themselves from liability.

Verified Authority on California Trust Litigation & Disputes

• The 120-Day Rule (Probate Code § 16061.7): California Probate Code § 16061.7
  The most critical statute in trust litigation. It establishes the 120-day deadline for contesting a trust after the notification is mailed. Missing this deadline usually ends the case before it starts.
• Caregiver Presumption (Probate Code § 21380): California Probate Code § 21380
  This statute protects seniors by presuming that gifts to care custodians are the result of fraud or undue influence. It is the primary weapon used to overturn “deathbed amendments” that favor a caregiver over family.
• No-Contest Clauses (Probate Code § 21311): California Probate Code § 21311
  Defines the strict limits on enforcing penalty clauses. It explains that a beneficiary can only be disinherited for suing if they lacked “probable cause” to bring the lawsuit.
• Petition for Instructions (Probate Code § 17200): California Probate Code § 17200
  The “gateway” statute for most trust litigation. It allows a trustee or beneficiary to petition the court for instructions regarding the internal affairs of the trust, from interpreting terms to removing a trustee.
• Asset Recovery “Backup” (AB 2016): California Probate Code § 13151 (Petition for Succession)
  Effective April 1, 2025, this statute provides a streamlined path (Judge’s Order) to resolve disputes over ownership of a primary residence valued up to $750,000, often avoiding costly Heggstad litigation.
• Digital Discovery (RUFADAA): California Probate Code § 870 (RUFADAA)
  Essential for modern litigation. This act governs who can access a decedent’s digital communications—often the “smoking gun” evidence in undue influence or capacity trials.