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Question:

My mother passed away a year ago. She had everything put in a trust that was to be evenly distributed between all six adult children. One brother and one sister are trustees and all six are beneficiaries. Over the years prior to the death of my mother, one of the trustees and a couple beneficiaries have taken loans from my mother that they have been paying back. Three are still outstanding. Is there a time frame in which these loans are to be paid and distributed between the beneficiaries?

Response:

That’s a tough one. If the loans had formal promissory notes with specific payment schedules, that might indicate how long each sibling has to pay back the trust. Even without a written agreement, if the borrowers were paying on a regular basis they would have a strong argument that that was the agreement and they shouldn’t be forced to pay back the trust more quickly.

But that can get complicated and drag out the trust distributions. It can also increase estate administration costs and require the filing of a tax return for the trust every year the process goes on. So it would be best if a solution could be found to shorten the payback. In situations like this, if the numbers work, we forgive the loans and treat them as trust distributions to the borrowers. An example should better explain what I mean.

Let’s assume that at your mother’s death the trust held $450,000 and there were outstanding loans in the amounts of $50,000, $75,000, and $91,000. We would treat these as assets of the trust, bringing its total value to $666,000. This would mean that each of the siblings would be entitled to $111,000. The three siblings who had not borrowed from the trust would each receive this amount outright. The others would receive, respectively, $61,000 ($111,000 – $50,000), $36,000 ($111,000 – $75,000) and $20,000 ($111,000 – $91,000). The total distributions would add up to the $450,000 in the trust — ($111,000 x 3) + $61,000 + $36,000 + $20,000 = $450,000.

This way, the trust could be completely distributed without waiting for the loans to be repaid. Of course, I got to make up the numbers so that they work. If there had been only $250,000 in cash with the same loan values, there would still be a shortfall. In such a case, some beneficiaries might have to wait until the loans were repaid. Or they might come to some agreement based on what the borrowers can afford now, in order to avoid dragging things out.

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