Borrowing against a trust is possible when the trust is irrevocable and either the trust document authorizes loans to beneficiaries or the trustee has broad enough discretion to approve one. The loan has to look like a real loan: a signed promissory note, an interest rate at or above the IRS Applicable Federal Rate, a repayment schedule, and a default remedy. If the trust is revocable, the question usually doesn’t come up, because the grantor can withdraw funds directly.
Revocable or Irrevocable Changes Everything
A revocable, or “living,” trust is one the grantor can modify or dissolve at any time. The grantor keeps full control of the assets and can pull money out whenever they want, so there is nothing to borrow against in any meaningful sense. The IRS treats a revocable trust as if it doesn’t exist separately from the grantor, and money moving in and out has no special tax consequences.
Borrowing becomes a real question only with an irrevocable trust. Once that kind of trust is set up, the grantor has given up control. The trustee manages the assets under the terms of the trust document, and beneficiaries cannot simply reach in and take what they need. Everything below assumes you are a beneficiary of an irrevocable trust asking whether you can get a loan from it.
What the Trust Document Says
The trust agreement is the first place to look, and often the last. Some trust instruments include an explicit loan clause spelling out maximum amounts, required interest rates, acceptable purposes, and collateral requirements. If yours does, follow it.
When the document is silent, statutory law fills the gap in many states. The Uniform Trust Code, adopted in some form by most states, includes a default provision giving trustees the power to make loans to beneficiaries on terms the trustee considers fair and reasonable, with a lien on the beneficiary’s future distributions for repayment. If your state follows this model and the trust doesn’t override it, the trustee already has authority to lend.
Even without a loan-specific clause, a trustee’s general discretionary powers may cover it. A trustee authorized to distribute for a beneficiary’s health, education, maintenance, or support can often interpret that authority as including a loan, especially where the family or the grantor’s plan makes an outright distribution a bad fit. Whether the trustee reads it that way is a judgment call, and trustees differ.
Spendthrift Clauses
Many irrevocable trusts contain a spendthrift provision, which stops a beneficiary from transferring or pledging their interest and shields trust assets from the beneficiary’s creditors. That clause does not prevent the trustee from making a loan directly to the beneficiary out of trust funds. What it does block is using your trust interest as collateral for a loan from an outside lender, which is a separate transaction covered further down.
Why a Loan Can Beat a Distribution
Before asking the trustee for anything, understand why a loan may be the better ask. An outright distribution to one beneficiary permanently reduces the pool available to the others. A loan puts the money back over time and keeps the trust’s principal intact for everyone who depends on it.
The tax picture also differs. A distribution can be taxable income to the beneficiary depending on the trust’s distributable net income. A properly structured loan is not a taxable event, because the beneficiary has an obligation to repay. The trust earns interest on the loan, which adds to its return. And when the grantor set up the trust specifically to avoid handing large sums outright, a loan honors that intent while still solving a real problem.
Getting the Trustee to Yes
Even when the trust document plainly allows a loan, the trustee has the final say, and that decision is shaped by fiduciary duties owed to every beneficiary, not just you.
Two duties matter most. The duty of impartiality requires the trustee to weigh the interests of all beneficiaries, current and future. Approving a large, poorly secured loan for one beneficiary at the expense of the others can violate it. The duty of prudence requires the trustee to manage trust assets the way a careful investor would. If you are a weak credit risk or the proposed terms don’t protect the trust, approval could expose the trustee to personal liability for any losses that follow.
Put your request in writing. Verbal conversations can start things off, but the trustee needs documentation to satisfy their duties and build a record. A useful request covers:
- The specific dollar amount and exactly what the funds will be used for. A home down payment, tuition, or a medical bill gives the trustee a concrete basis for approval.
- A realistic repayment plan showing your income, assets, and timeline.
- Supporting documentation. Financial statements, purchase contracts, or medical bills that back up both the need and your ability to repay.
Expect back-and-forth. The trustee may counter with a smaller amount, different terms, additional collateral, or a co-signer. A beneficiary asking for help with a home or a medical emergency is in a stronger position than one funding a speculative venture, and the trustee is not being difficult by pressing on the details.
Loan Terms the Trust Will Require
An approved trust loan has to be documented like a commercial transaction. The centerpiece is a promissory note signed by the beneficiary that spells out the principal, interest rate, repayment schedule, maturity date, and consequences of default.
The Applicable Federal Rate
Interest must meet or exceed the IRS Applicable Federal Rate for the month the loan is made. The AFR is published monthly and varies by term. For January 2026, the annual-compounding rates were 3.63% for short-term loans of up to three years, 3.81% for mid-term loans of three to nine years, and 4.63% for long-term loans over nine years.1Internal Revenue Service. Revenue Ruling 2026-2 These change monthly, so the rate that governs is the one in effect when the loan is executed.2Internal Revenue Service. Applicable Federal Rates
Charging less than the AFR creates tax problems. Under federal law, the IRS treats the shortfall as “forgone interest.” The forgone interest is deemed transferred from the trust to the beneficiary as a gift or distribution, and then deemed paid back to the trust as interest. The trust ends up with phantom income, and the transfer side can raise gift tax issues.3Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates
Default
The note should say what happens if you stop paying. The standard remedy is an offset: the trust deducts the outstanding balance from any future distribution you would have received. Some notes add an acceleration clause making the whole balance due at once on default. Both mechanisms give the trustee a clear path to collect without going to court.
Tax Treatment
A properly structured loan at or above the AFR is not taxable to the beneficiary. You received money you owe back, so there is no income. The trust reports the interest it receives as income on its own return.4Internal Revenue Service. About Form 1041, U.S. Income Tax Return for Estates and Trusts Whether you can deduct the interest you pay depends on how you use the loan proceeds, which is a question for a tax professional who knows the facts.
The largest risk is recharacterization. If the IRS looks at the transaction and decides it was really a distribution wearing a loan’s clothes, the whole amount becomes taxable trust income to the beneficiary in the year it was received. That happens most often when there is no promissory note, no interest or below-AFR interest, no fixed repayment schedule, or when no payments are actually made. Following the formalities is what keeps a loan a loan.
For loans that are genuine but below-market, the imputed interest rules still apply. A narrow exception exists for gift loans of $10,000 or less between individuals, and for loans up to $100,000, the imputed interest the lender must recognize is capped at the borrower’s net investment income for the year.3Office of the Law Revision Counsel. 26 USC 7872 – Treatment of Loans With Below-Market Interest Rates Whether those individual-to-individual carveouts reach a trust-beneficiary loan depends on the trust type and the parties, so professional advice is worth the cost.
If forgone interest on a below-market loan is treated as a gift, the annual gift tax exclusion, which is $19,000 per recipient in 2026, may absorb it.5Internal Revenue Service. Frequently Asked Questions on Gift Taxes On a loan structured at or near the AFR, the forgone amount is usually too small to matter. The real gift tax exposure comes from loans set up with zero interest or with planned forgiveness, which the IRS treats as a series of gifts.
Using a Trust Interest as Outside Collateral
Instead of borrowing from the trust, some beneficiaries try to pledge their trust interest to a bank or other commercial lender. This is a different transaction and much harder to arrange.
The first obstacle is the spendthrift clause found in most irrevocable trusts, which stops you from pledging your future interest as security for a debt. A lender has no reliable way to collect if you default.6Legal Information Institute. Spendthrift Trust Even without a spendthrift clause, most lenders won’t touch it. A discretionary trust interest depends on future decisions by the trustee, which makes it hard to value and harder to seize. Banks want collateral they can take and sell, and a contingent trust interest doesn’t clear that bar.
Some specialty lenders will work with trust beneficiaries, but expect higher rates, larger fees, and a more involved underwriting process. The trustee may also need to cooperate by producing information about the trust. Where borrowing from the trust directly is available, it is almost always simpler and cheaper.
If the Trustee Refuses
A no from the trustee is not always the end. Ask why. A trustee who denies a loan because the document doesn’t authorize it or because approval would harm other beneficiaries is probably acting within their authority. A trustee who refuses without explanation, or who appears to be acting in bad faith, is a different problem.
Beneficiaries have recourse when a trustee breaches their duties. You can petition a court to compel an accounting, which forces transparency about the trust’s assets and transactions. If the trust plainly authorizes what you are asking for and the trustee unreasonably withholds it, a court can order the trustee to act. Serious misconduct or unfitness can lead to removal and replacement, and the trustee can be held personally liable for losses caused by the breach.
Before litigation, a formal written demand from an attorney often resolves things. Many trustee disputes come from miscommunication or the trustee’s own uncertainty about their authority rather than genuine bad faith, and legal fees for trust litigation add up quickly on both sides. Most trustees engage seriously once they see the beneficiary has counsel.