Can my personal trust loan money to our family trust to purchase a home? I feel, in these uncertain times, (dollar plummeting stock market jitters) my money will be more useful. (monthly payment to the bank will be less of a burden). Tax implication? (No interest loan now. Later, upon sale of home % appreciation to be allocated to original loan.
We'll try to answer your questions but a number of your comments weren't clear and the terminology you used for trusts is not detailed enough to really determine what the trusts are, but we'll try. The biggest problem is not enough information to discern why one trust is loaning money to another to buy a house. Why is a trust buying the home instead of the person living in the home buying it directly? What is the difference between the two trusts?
Can my personal trust loan money to our family trust to purchase a home? A "Personal trust" could mean any type of trust. It could be a revocable living trust, a child's trust your parents set up for you or many other types of trusts. The type of trust could be important to determining the implications of the transaction so you'll need to have an estate planner and CPA review the transactions. A key issue is what the terms of your "personal trust" permit. Does it permit you to make a loan? Are there restrictions in the trust agreement on this? Who are the trustees (persons who run the trust)? A trustee is a fiduciary (position of trust). Since the loan sounds to be a related party loan that may raise issues as to whether it is appropriate for the trustee to make such a loan as an investment of the trust estate. This is why it is important to determine the type of trust, who the trustees are, who the beneficiaries are, and what the investment provisions of the trust provide for. If this "personal trust" is just a revocable living trust that you can change anytime you want then you may be able to do anything.
You say your "family trust" is buying the home. What is a family trust? Is it a bypass trust, life insurance trust, what? Does that trust have the authority to buy a home? Can it let people use the home? Must it charge them rent? You need to review the trust and evaluate what it can do. If a trust buys a home instead of the individuals, you may sacrifice the home mortgage interest deduction, the home sale exclusion and other potentially valuable tax benefits. However, if the trust is a "grantor trust" (a trust on which the grantor pays the income taxes) those tax benefits may not be lost.
I feel, in these uncertain times, (dollar plummeting stock market jitters) my money will be more useful. (monthly payment to the bank will be less of a burden). That is an economic decision, your call.
Tax implication? (No interest loan now upon sale of home % appreciation to be allocated to original loan. If you make a loan and don't charge interest you could trigger the below market interest loan rules of the tax code. These are complicated and whether they are triggered and their implication depends on the size of the loan, the investment assets, etc. For more information on this issue see the November 2007 issue of the practical planner newsletter on www.shenkmanlaw.com. That same article should also appear in this website. If you did opt to charge interest and did not record a mortgage that interest would not be deductible under the home mortgage interest rules.
Given the issues, need to have the trust reviewed, and the potential for many tax implications, you really should consult with an estate planner and CPA in your area. Instead of presenting the transaction to them, present the facts of what you have and your objectives, and let them advise you. With a proper presentation of the facts resolving this will be much simpler.
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