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Can my family use a home that is in our family's irrevocable trust as collateral to purchase another home for rental income?

Pleasanton, CA |

I am the trustee for the trust, as well as one of three beneficiaries. (My two brothers being the other two) I have discussed this with my family, and we agree that it would be a good investment.

ps the home is owned outright with no mortgages/liens.

Attorney Answers 3


  1. You should bring your documents to a trust administration attorney. It is unclear from your question what is going on exactly. Outright ownership indicates that the property has been distributed. If the property continues to be held in trust for some reason, then only the trustee can encumber the property and only if it's allowed pursuant to the terms of the trust.

    THESE COMMENTS ARE NOT LEGAL ADVICE. They are provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction. The answer to question does not create an attorney-client relationship or otherwise require further consultation. Mrs. Cook is licensed to practice law throughout the state of California with offices in San Diego County. She is authorized to handle IRS matters throughout the United States, and is also licensed to practice before the United States Tax Court. IRS CIRCULAR 230 DISCLOSURE: To ensure compliance with requirements imposed by the IRS, please be advised that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used or relied upon, and cannot be used or relied upon, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.


  2. You need to review the terms of trust. Assuming the terms of trust would allow you to encumber the property the issue you face is whether you could obtain the loan you seek. If is very difficult for a trust to obtain a loan to purchase real property especially if the trust has insufficient present income to support the monthly payments..

    Assuming all beneficiaries agree, and if you could find a lender, it's probably doable if the trust already has sufficient income to support the mortgage payments. If you're counting on future income, as opposed to present income, you're probably out of luck.

    I also doubt the trust would receive the favorable loan rates or terms available today. You're probably talking only about a hard money lender which may make such an option considerably less attractive. If you are the trustee, it is essential that you have legal advice and representation before you embark on such an endeavor as your liability would be great. Good luck.

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  3. I am assuming that when you state that the home is owned outright that you are referring to the fact that it is debt free and that you do not mean that there has been some type of distribution made. Is that correct? As both Attorney Cook and Attorney Daymude advise, much depends on the terms of the trust. You would be wise to have the trust reviewed by an estate planning attorney. It is certainly beneficial that all the beneficiaries are in agreement but it is still the terms of the trust, along with relevant Probate Code provisions that are controlling. The trust most likely contains a number of provisions that outline the trustee powers. It is possible that these terms include the power to use one property as collateral for additional property purchases that benefit the trust.

    It is also important to determine the nature and the purpose of the irrevocable trust. Is the trust irrevocable because the Trustor/Trustors (sometimes called “settlors”) are deceased and the trust became irrevocable upon his/her/their death/deaths? In that case, the trustee (you) probably do have authority to encumber one property to purchase another, if it is in the best interest of the trust.

    Or, on the other hand, is the trust irrevocable for tax, medical planning or special needs purposes? If it is one of those types of trusts, then special rules, regulations and codes may be applicable in order to preserve the purpose of the trust.

    You are on the right track in seeing information before you commit to the action of encumbering the home. Consulting with an estate planning attorney would be the next step. I hope this information helps you.

    Disclaimer: The above answer does not create an attorney/client relationship. My responses are intended to provide general information about the question posted. I am licensed to practice in the state of California. The information provided on this site should not be used as a substitute for conferring with or hiring a competent legal advice from a licensed attorney that practices in the subject area in your state.

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