Pledging Trust Assets to Secure Beneficiary Loans

The beneficiary of an irrevocable trust wants to take out a personal loan. The lender requires collateral, and the beneficiary has nothing outside the trust that he can pledge. However, the lender is willing to accept trust property as collateral for the debt. The trust says nothing about using trust assets to secure the loans of a beneficiary. Can the trustee do so?

Thanks to an easily-overlooked statute in the Tennessee Trust Code, the answer is yes:

Unless the terms of the instrument expressly provide otherwise and without limiting the authority conferred by  T.C.A.§ 35-15-815, a trustee may: … Pledge trust property to guarantee loans made by others to the beneficiary.

But what if the trust has a spendthrift clause? A spendthrift clause is a provision in a trust that prohibits beneficiaries from voluntarily or involuntarily assigning or pledging their trust interests. Here, it is the trustee that would be pledging the trust property, so the spendthrift provision does not apply.

Source: T.C.A. § 35-15-816(b)(19) (alternate link)

Posted by Joel D. Roettger, JD, LLM, EPLS

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