Can You Borrow Money From an Irrevocable Trust?

An irrevocable trust is a good estate-planning tool to shield against estate taxes and other estate expenses. Putting property that will escalate in value or big life insurance policies into an irrevocable trust protects them from estate taxes. It can also protect these assets from the trust grantor's creditors.

The problem with an irrevocable trust is just that: You can't revoke it or change its terms. Once you've put something into an irrevocable trust, you no longer have control since it belongs to the trust. Only the designated trustee has control, subject to the terms of the trust.

If a life insurance policy is put into a trust or if a trust buys a policy for its namesake grantor, it is outside the reach of the person named in the policy or its beneficiaries. You can't borrow money against it. The trust in most cases also cannot borrow money against a policy that it has bought in the name of the trust grantor.

Keep in mind that if the person whose life is insured also owns the policy, his or her survivors may prove subject to inheritance taxes on the proceeds of the insurance policy. However, if this type of trust is set up and named as the owner and policy beneficiary, the person meant to benefit from the policy set up as the trust's beneficiary.

It is possible for a grantor to have a trust written to provide for borrowing money held in the trust, but this is extremely rare. Most lenders also are reluctant to make loans on assets that they cannot seize in case of default. In nearly all circumstances, money cannot be borrowed from in irrevocable trust.

You generally also cannot borrow assets in an inter-vivos trust, more often referred to as a living or revocable trust. The same provision applies: You don't own the property, the trust does. However, you can modify a living trust at any time. If you want to borrow against a house or other trust property, you simply revise the trust agreement to remove the property, get the loan and then put the property back into the trust.

Once the creator or grantor of the trust has died, a revocable trust becomes irrevocable. The designed trustee controls all the assets, and the beneficiaries cannot borrow money from the trust. They receive money from the trust subject to its terms, usually in the form of distributions.