Loan Trust Arrangements
The first part of a loan-trust arrangement is a simple demand loan agreement which spells out the loan’s terms, including
- the repayment of the principal and accrued interest, if any, to the lender on demand or to the lender’s estate on the lender’s death, and
- any demand by the borrower to repay all or a portion of the principal and accrued interest, if any, becomes payable between 10 and 30 days after the lender submits a written request to the borrower, but no principal is repayable to the lender if the borrower receives the request within 10 days of the lender’s death. (The number of days may be different, but these numbers are recommended for practical reasons such as mail delivery delays.)
The second part of the arrangement is a trust into which the lender’s rights that exist immediately before death are transferred by the lender. The charity (i.e., the borrower) might be the trust’s sole capital beneficiary, and the amount which the charity is entitled to receive as beneficiary is offset against its obligations to repay its indebtedness under the loan agreement.
By using this arrangement, the donors have access to the loan funds during their lifetime. Unneeded capital, however, is automatically contributed to an inter vivos trust (i.e., a private trust created during the donor’s lifetime) immediately before death to benefit the charity. In this way, the remaining capital in the loan account does not become part of the last surviving donor’s estate. No probate fees, therefore, would have to be paid on the property contributed to the trust on the last surviving donor’s death. Furthermore, such loan-trust assets are a private matter between the donor and the charity, which do not need to become public. Gifts made via loan-trust arrangements, therefore, are shielded from potential challenge by a will’s beneficiaries. A bequest to a charity made in a will is subject to a potential challenge by other beneficiaries or even a related person who is not named as a beneficiary.
The purpose for setting up a loan-trust arrangement, among other reasons, might include the following:
- A donor plans to leave a 10% of her assets to a specific charity at her death. Let’s assume that the 10% is worth about $50,000 today. The donor needs the income generated by investing the $50,000 during her lifetime to meet current living expenses. The donor also is not certain that some of her capital assets may not be needed in the future for nursing home or other needs. Consequently, she does not want to irrevocably part with any of her assets at this time. By entering into a loan-trust agreement with a charity, the donor can be assured that she will receive the investment income during her lifetime and that she can withdraw any portion of the principal as needed. However, if the principal is not needed during her lifetime, it transfers to the trust and she receives a receipt for the full $50,000 immediately before her death. That receipt can be used to offset income that might be triggered because of the remaining value of a RIF or other investments.
- A donor has no significant income at this time against which to deduct a charitable receipt if he establishes a private trust. He determines that a receipt in the year of death would be more advantageous. By entering into a loan-trust arrangement even where he decides to make the loan interest-free, he ensures that the receipt will be available in the year of death.
- A donor may have very low annual income or income that is just above the threshold that causes the Old Age Security pension to be clawed back. As a result of significant interest income the donor may not obtain the full value of OAS, Guaranteed Income Supplement or GST rebates. At the same time, the individual is a generous donor to her church. By entering into a loan-trust arrangement at a substantially reduced or no interest rate, the donor may be able to avoid the investment income that causes her OAS to be clawed back, that eliminates her from GIC consideration, or that prevents her from collecting the GST rebate.
If you have any questions, contact us.
The purpose of CCCC Stewardship Services is not intended to replace legal and other professional advisers. The goal is to provide Christians with information based on biblical principles to enhance the stewardship of resources entrusted to them.
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