This article is for informational purposes only
It does not constitute legal advice. Please consult a qualified California trust and estate attorney before taking any action as a successor trustee.
The Short Answer
Yes. A successor trustee in California can borrow against trust-owned real property, provided the trust document grants that authority and the trustee is acting in compliance with their fiduciary duties. In most California trusts drafted after the 1980s, this authority is expressly stated. Even where it is not, California Probate Code grants trustees broad powers to manage trust assets, which courts have interpreted to include the power to encumber real property for trust purposes.
That said, the authority to borrow does not mean any borrowing is automatically appropriate. The trustee must be able to articulate a legitimate trust purpose for the loan and must document that the decision was made in the best interests of all beneficiaries, not just those who want cash now.
Authority Under the Trust Document
The first place to look is the trust document itself. Most California trust documents include a power to encumber provision, sometimes labeled as such or sometimes included in a broader list of trustee powers. This provision typically authorizes the trustee to mortgage, pledge, or grant security interests in trust assets.
If you cannot locate this provision in your trust document, do not assume the authority does not exist. Many trust documents incorporate powers by reference to California statute. Your attorney can confirm whether the statutory powers apply even when the trust document is silent on a specific issue.
Authority Under California Probate Code
California Probate Code Section 16225 authorizes a trustee to borrow money and to encumber trust property as security for the repayment of those borrowed funds. This statutory authority exists independently of what the trust document says, though a trust document can restrict it.
The code also requires that the trustee's exercise of this power comply with the duty of loyalty (acting in the interests of the beneficiaries) and the prudent investor rule (making decisions a prudent person in a similar situation would make).
In practice, borrowing against trust property to fund a beneficiary buyout, pay off a reverse mortgage before foreclosure, make pre-sale improvements, or cover legitimate administration expenses is almost always defensible as a reasonable exercise of trustee authority. Borrowing to benefit the trustee personally or to favor one beneficiary over others improperly is not.
When Court Approval Makes Sense
Most trust loans do not require court approval. A trustee acting under a standard California trust document with a power to encumber can borrow against trust property without a court order.
However, there are situations where seeking court approval is prudent even when not strictly required. If the beneficiaries are in active disagreement about whether to borrow, if one beneficiary is challenging the trustee's authority, or if the loan terms are unusually complex or the loan amount is very large relative to the trust estate, a court confirmation can protect the trustee from personal liability for the decision.
Some trustees also choose to obtain a trust protector's approval or a beneficiary vote when the governing instrument allows for it, as a way of building a documented record of consensus. This is not legally required in most cases, but it is practically smart when family relationships are strained.
Fiduciary Duty Considerations
The trustee's duty does not end with confirming that the authority to borrow exists. Taking on debt on behalf of the trust is a significant decision, and the trustee should be prepared to explain it.
Document the purpose of the loan clearly. Document the alternatives that were considered and why the loan was the best option. If beneficiaries requested the loan, get that request in writing. If you received advice from counsel or a financial advisor, document that advice.
The beneficiary notice requirement under Probate Code Section 16061.7 may require you to provide notice of the loan transaction to beneficiaries in certain circumstances. Your attorney can advise on whether and how that requirement applies to your specific situation.
Keep a paper trail
Your personal liability as a trustee is substantially reduced when you can show that you made an informed decision, received appropriate advice, notified beneficiaries as required, and documented your reasoning. A good lender will support that process, not rush past it.
Frequently Asked Questions
What is a trust certification and do I need one?
A trust certification is a condensed document that summarizes key information about the trust: the trustee's name and authority, the trust's existence and basic terms, and the trustee's powers. California Probate Code Section 18100.5 establishes the statutory form. Lenders and title companies typically require one instead of the full trust document to protect the confidentiality of trust terms that are irrelevant to the transaction.
Do all beneficiaries have to consent to the loan?
In most cases, no. The trustee has independent authority to borrow on behalf of the trust. However, the trustee must provide notice to beneficiaries in certain circumstances, and some trust documents require beneficiary approval for specific types of transactions. Check your trust document and confirm with your attorney.
Can a corporate trustee take out a trust loan?
Yes. A corporate trustee, such as a professional fiduciary company or a bank trust department, has the same statutory authority to borrow against trust property as an individual trustee. Corporate trustees typically apply a more formal approval process internally before proceeding with a loan.
What if the trust has multiple beneficiaries with conflicting interests?
This is the most common source of trustee stress in these transactions. The trustee's obligation is to act in the interests of all beneficiaries, not to favor the loudest voice. If a loan is genuinely in the best interests of the trust as a whole, the trustee can proceed while documenting that reasoning carefully. If the situation is genuinely contested, an attorney can help structure the transaction in a way that protects the trustee's position.