Question: I am a beneficiary of my grandfather’s estate. There was a lot of real estate and most has been sold. The trustee has distributed all available cash to us. There is one more property to sell but it is just sitting on the market. I asked the trustee if I could get a loan and have it secured against my share. The trustee said no, it is against the law. Is that true? If I am entitled to a share and want to get a loan on it, why should I have to wait until the property sells?
Answer: Your grandfather’s trust most likely contains a “spendthrift” clause which, among other things, prohibits beneficiaries from using their future inheritance as collateral for loans until the property is received by the beneficiary. This clause is in most trust documents and is used primarily to protect beneficiaries.
Say that when your grandfather died, you were experiencing financial difficulties and creditors were placing liens on your bank accounts or other assets. With a spendthrift clause, a creditor cannot lien your future inheritance even though you are entitled to receive the inheritance. This might give you time to deal with creditors before the inheritance comes into your possession and thereby keep it from being depleted to satisfy prior debts. The spendthrift clause can also help protect an inheritance should a beneficiary be in the middle of a divorce or if a divorce is being contemplated. It is worth noting here that an inheritance is a separate property asset until it is received by a beneficiary and commingled with a spouse’s assets at which time it (usually) becomes community property.
Selling real estate can take time so, if beneficiaries are in desperate need of funds, a trustee can help by obtaining a short-term loan secured by real estate and distribute the loan proceeds to beneficiaries. The spendthrift clause does not prohibit a trustee from obtaining a loan and securing it on trust assets. When the property is eventually sold, the loan gets paid off and whatever is left goes to the beneficiaries. However, the cost of such a “hard money” loan can be high because banks and other traditional lenders are reluctant to provide loans secured by trust property. So, while you may be anxious for funds, the other beneficiaries may not be in favor of the trustee getting a loan and paying high interest and fees.
As I have said before, beneficiaries should never count on receiving inherited money or make financial plans around a future inheritance. Any money we inherit is a gift; our parents or grandparents are not obligated to leave us their estates. Also, with today’s high cost of end-of-life-care, much of a future inheritance could be expended before death.
If the trustee in your situation is not willing to get a loan or if the other beneficiaries are not in support of such a loan, you could ask another beneficiary of the estate for a loan – it will need to be a handshake deal since you cannot offer to collateralize your share.
Question: I appreciate your column but sometimes you leave out important information. Can you please provide more complete answers?
Answer: Sorry to be blunt but, no, I cannot. I have limited space and I attempt to explain sometimes complex legal strategies and options to readers who are not always familiar with the law. I am hopeful that the information provided prompts further investigation or discussion, but it cannot provide complete answers. Rather than calling it a legal answer, it might be more concise to say my answers are CliffsNotes for certain legal situations.
Liza Horvath has over 30 years of experience in the estate planning and trust fields and is a licensed professional fiduciary. Liza currently serves as president of Monterey Trust Management. This is not intended to be legal or tax advice. If you have a question, call (831) 646-5262 or email liza@montereytrust.com
