Lending to an irrevocable trust

[Adam Odom]

I'm actually a banker and had a trust attorney stump me yesterday. He asked why banks do not lend anymore to irrevocable trusts and I knew the answer was "no" (at least at the ones I've worked for) but didn't really know the "why." My underwriter gave the answer that technically the trust is the owner of the collateral but the trustee is who we would have to go after therefore it's basically an unsecured loan so we stay away. My question is - if that's true why can you potentially do a revocable trust loan? Wouldn't that be the same issue? Or is it just banks have gotten more conservative, possibly because this went to court and someone lost so all steer clear of them now.

[Andrew A.]

Hi @Adam Odom - Interesting topic, and one that I've dealt with regularly in estate planning matters. At its essence, an irrevocable trust agreement is a 'completed gift,' or to say it another way, the grantor/settlor has fully, finally and forever release ownership of the property they are transferring into the trust. Thus, recourse against the grantor/settlor is virtually impossible because they don't own, and are therefore not responsible for, trust liabilities (except in cases where the government wants a pound of flesh, of course). However, when dealing with a revocable trust, you have an 'incomplete gift,' that is to say that the grantor/settlor can, at any time, reverse the transaction and take back the trust property, and therefore remains liable for trust obligations. This is a major oversimplification, but I hope it helps clear up the issue to some degree!