As a general rule, a trustee cannot borrow money from a trust. Taking a personal loan from trust assets is self-dealing, and self-dealing violates the duty of loyalty that every trustee owes the beneficiaries. There are three narrow exceptions: the trust document expressly permits it, all beneficiaries give informed consent, or a court approves the loan in advance. Even then, the loan has to be documented, secured, and priced like a deal with a commercial lender.
Why the Default Answer Is No
The duty of loyalty requires a trustee to manage trust assets solely for the benefit of the beneficiaries. More than 35 states have adopted some version of the Uniform Trust Code, and under that framework any transaction involving trust property that the trustee enters into for personal account, or that creates a conflict between personal interests and fiduciary duties, is voidable by any affected beneficiary.
A personal loan is the clearest possible conflict. As the borrower, you want the lowest interest rate, the longest term, and the loosest collateral. As the fiduciary, you should be demanding the opposite. No one can honestly negotiate both sides of that table.
Trust law handles this with the “no further inquiry” rule. Once a court identifies a self-dealing transaction, it treats the transaction as a breach without examining whether the terms were fair or the trustee acted in good faith. A trustee who borrows at a generous rate, makes every payment on time, and repays every cent still committed a breach the moment the loan was made without authorization.
If You Created the Trust and Can Still Revoke It
The self-dealing rules work differently when you are the settlor, the trustee, and the trust is still revocable. Under the Uniform Trust Code, the trustee’s duties run exclusively to the settlor while the trust remains revocable. If you funded your own revocable living trust and can dissolve it tomorrow, moving money between your personal accounts and the trust is closer to shifting funds between your own pockets than borrowing from someone else. Most people in this position don’t structure a formal loan at all. They take a distribution or amend the trust.
Once the trust becomes irrevocable, the full duty of loyalty kicks in. That usually happens on the grantor’s death. Successor trustees who step in after a family member dies are often caught off guard by this shift, because the account balances look the same but the legal rules governing what the trustee can do with them have changed completely.
The Three Ways a Trustee Loan Can Be Authorized
For an irrevocable trust, three paths can turn an otherwise prohibited transaction into a permitted one. Each requires action before the money moves, not after.
The Trust Document Expressly Allows It
The grantor can write a provision into the trust instrument that specifically permits loans to the trustee or waives the self-dealing prohibition. Courts read these provisions strictly. Generic language about “broad investment discretion” is not enough. The document has to clearly contemplate the trustee borrowing.
Even with explicit authorization, you are not free to write yourself a blank check. The duty of good faith still applies, and terms that visibly disadvantage the trust can still be challenged.
All Beneficiaries Give Informed Consent
Every beneficiary with a current or future interest can collectively agree to the loan, but the consent must be fully informed and freely given. You have to disclose every material detail: amount, interest rate, repayment schedule, and collateral. A beneficiary who consents without knowing the material facts can later void the transaction.
The practical hurdle is unanimity. Two adult beneficiaries is manageable. A multi-generational trust with minor children or unborn beneficiaries is not. Many states allow “virtual representation,” under which a parent or court-appointed guardian consents on behalf of a minor or incapacitated beneficiary, but tracking down every interested party and documenting their consent can make this path impractical.
A Court Approves the Loan
When the trust document is silent and unanimous consent is not feasible, you can petition a court for permission. This is the slowest and most expensive option. You will have to show that the loan serves the trust’s interests, or at least does not harm them, that the terms are fair, and that no better alternative exists. The judge scrutinizes the arrangement independently and can refuse. Filing fees alone typically run a few hundred dollars, and attorney fees will add substantially more.
Terms an Authorized Loan Has to Meet
Permission is the first step. The loan itself still has to look like an arm’s-length deal with an unrelated lender.
A Fair Market Interest Rate
The rate must be at or above the Applicable Federal Rate that the IRS publishes monthly for the loan’s duration. As of April 2026, those minimum rates are 3.59% for short-term loans (up to three years), 3.82% for mid-term loans (three to nine years), and 4.62% for long-term loans (over nine years), assuming annual compounding.1Internal Revenue Service. Rev. Rul. 2026-7 Setting the rate below the AFR triggers the below-market loan rules and invites the argument that the trustee negotiated favorable terms for themselves.
Real Collateral
You should pledge personal assets sufficient to cover the full loan amount, and the trust’s claim against that collateral has to be legally enforceable against other creditors. For real estate, that means a recorded deed of trust or mortgage. For financial accounts or investment property, it means a formal control agreement with the institution holding the assets. A handshake is not security.
A Written Promissory Note
A formal note has to spell out the principal, interest rate, repayment schedule, maturity date, and consequences of default. The note creates an enforceable obligation and gives beneficiaries a clear record to review. Record the loan in the trust’s accounting as well, since beneficiaries of irrevocable trusts are entitled to see it.
The Tax Trap of a Below-Market Rate
A loan between a trust and its trustee or a related party that carries an interest rate below the AFR is not only a fiduciary problem. Under 26 U.S.C. ยง 7872, the IRS treats the forgone interest as a taxable event.2Office of the Law Revision Counsel. 26 U.S.C. 7872 – Treatment of Loans With Below-Market Interest Rates The difference between the interest actually charged and the interest that would have been charged at the AFR is imputed as if it were transferred from the lender to the borrower, creating phantom income and potential gift or distribution consequences.
A trust loan at 1% when the applicable AFR is 3.82% means the IRS treats the missing 2.82% as if it were actually paid. The trust can end up owing tax on interest income it never received. Getting the rate right protects the beneficiaries and the trust’s tax return at the same time.
What Happens If You Borrow Without Authorization
Borrowing without one of the three authorizations is a breach of fiduciary duty regardless of whether the trust lost money. Under the Uniform Trust Code framework, courts have broad discretion to fashion remedies:
- Repayment of the full amount plus interest calculated to compensate the trust for lost investment returns, not just the rate the trustee was paying.
- Disgorgement of any profits the trustee earned using the borrowed funds. If you invested the money and returned 15%, that gain belongs to the trust on top of repayment.
- A surcharge for the full personal benefit received, which some jurisdictions impose even when the trust was eventually repaid in full, as a deterrent.
- Removal as trustee and appointment of a successor.
- Reduction or denial of trustee compensation for the period of the breach.
- An order to pay the beneficiaries’ attorney fees.
The transaction itself is voidable at the beneficiary’s election. Because of the no-further-inquiry rule, the beneficiary does not have to prove the loan was unfair. Proving it happened without authorization is enough.
When It Becomes Criminal
Most unauthorized borrowing plays out in civil court. When the facts look more like theft, though, particularly if you had no genuine intent to repay, embezzlement or grand theft charges become a real possibility. The line between misdemeanor and felony treatment depends on the amount and varies by state. Criminal prosecutions of trustees are relatively uncommon because they take significant government resources, but a trustee who drains trust accounts for personal use is running a risk that goes well past a civil surcharge.