Beneficiaries often request that a trustee make them a loan from trust property. In an economic downturn, such requests are even more prevalent. As a general rule, a trustee should not want to make a loan to a beneficiary as it should assume that the beneficiary will default and the trustee will then be placed in a situation of having to collect on a debt from a beneficiary, a person to whom the trustee owes a fiduciary duty. Yet, the trustee may have pressure to make such a loan: the loan document may require it or suggest that same should be made, the beneficiary may have a right to remove the trustee, the settlor may want the loan to occur, the trustee may like the beneficiary and want to assist him or her, the trustee may have other non-trust relationships with the beneficiary or the beneficiary’s family, etc. There are many different ways that a beneficiary or others may exert pressure on the trustee to make such a loan.
There are many different issues that arise from this type of transaction: a trustee’s duty to follow the terms of the trust, statutes, and common law; a trustee’s duty to properly manage trust assets; a trustee’s obligation to work with co-trustees; a trustee’s duty of impartiality among multiple beneficiaries; a trustee’s duty to conduct due diligence, a trustee’s ability to limit risk associated with such a transaction; a trustees right to make distributions and care for a beneficiary, and a trustee’s right to offset debts owed by a beneficiary. This article addresses these many concerns and provides suggestions to trustees who find themselves in this unenviable position.
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