The family trust has cash. One of the family's LLCs needs it, for a property, a renovation, a slow quarter. The trustee wires the money and everyone treats it as "the family helping itself". Three years later the trust's accounting shows a $200,000 asset called "loan to Maple Rentals", Maple's books show nothing, the payments that came back were booked as transfers, and the trust's beneficiaries, one of whom is not the LLC's owner, want to know what happened to their money.
Loans between a trust and an LLC are the intercompany loan with an extra layer: fiduciary duty. The trustee owes the beneficiaries a documented, enforceable, interest-bearing asset, and the LLC owes its members a properly recorded liability. This guide covers how to document a loan in either direction between a trust and an LLC, the interest and self-dealing questions, the entries on both sides, and the reporting the trustee has to be able to produce.
Trust lends to the LLC. The trust holds a note receivable; the LLC holds a note payable. The trustee has made an investment of trust assets and must be able to justify it as prudent: a real rate, security if a bank would want it, and a borrower that can repay.
LLC lends to the trust. Less common, and more scrutinized: the LLC's other members (if any) are financing the trust's beneficiaries, and if the trust is irrevocable the loan can look like a distribution to the beneficiaries by another name. It needs the same note and, usually, the consent of the LLC's members.
In both directions, if the same person is trustee and manager of the LLC, the transaction is with themselves on both sides, and the paperwork has to be good enough for a beneficiary or a court to read later.
A trustee lending trust money to an LLC that the trustee or a beneficiary owns is a related-party transaction, and many trust instruments and state laws restrict or condition self-dealing. Before the wire: read the trust document for lending and self-dealing provisions; if the trust is irrevocable, consider written consent from the beneficiaries or a court order for a large loan; document why the loan is a prudent investment for the trust (rate, security, term, borrower's ability to repay); and treat the note as an investment the trustee reviews each year like any other.
A promissory note between the trust (signed by the trustee, as trustee) and the LLC (signed by the manager), with principal, rate, payment schedule, maturity, default terms, and any security (a mortgage on the property the LLC is buying is common and sensible). Add: a trustee's resolution or memo recording the decision and the reasons; consent of the LLC's other members if the operating agreement requires it; and, for an irrevocable trust, whatever the instrument requires for related-party transactions. Date everything on the day the money moves.
Charge at least the IRS applicable federal rate for the loan's term. Below that, the IRS can impute interest, and for an irrevocable trust a below-market loan to a beneficiary's company can be treated as a gift or a distribution. While the trust is a grantor trust (the usual revocable living trust), interest paid by the LLC to the trust and received by the trust is, for income tax, interest the grantor paid to themselves: it nets out on the grantor's return if the LLC is also disregarded to the same person. It still has to be booked on both sides, because the trust's accounting and the LLC's books are separate records with separate readers, and because the moment the trust stops being a grantor trust, the interest is real income to a separate taxpayer.
| Event | Trust's records | LLC's books |
|---|---|---|
| Loan made | Note receivable from the LLC (an investment of the trust); cash down | Note payable to the trust; cash up |
| Each payment | Interest income; note receivable reduced by the principal portion | Interest expense; note payable reduced by the principal portion |
| Year end | Note balance matches the LLC's; accrued interest if a payment is due | Note balance matches the trust's; accrued interest if due |
| Default or forgiveness | Write-down documented by the trustee; for an irrevocable trust, potential distribution to the beneficiary-owner | Debt forgiveness income unless an exception applies |
The mechanics of the payment split are the same as for any intercompany note: interest on the outstanding balance for the period, principal as the remainder, both sides updated, balances matched at every close. Our guide to loans between LLCs has the worked schedule.
A trustee can be asked for an accounting by a beneficiary at any time, and by a court after a death. For the loan, the accounting has to show: the note; the decision record; the balance at each period end; every payment received with its interest and principal split; any missed payments and what the trustee did about them; and the current value of the note as a trust asset. A trustee who can only say "the LLC paid us $1,250 a month" is not accounting; a trustee who can produce the schedule is.
At the grantor's death, the note is an asset of the trust (or of the estate, if the loan was made personally), valued at its balance, and the LLC's liability to repay it is part of the LLC's value. If the loan was documented and tracked, the successor trustee inherits a schedule. If it was not, the successor inherits an argument between the trust's beneficiaries and the LLC's owner, who may be the same people, in which case the argument is with the IRS instead. Our guide for attorneys on estate planning with multiple LLCs covers the loan as an estate asset in more detail.
HaraPro keeps the trust and the LLC as separate entities in one login, with the note as an instrument the payments are linked to, so the trust's schedule and the LLC's liability are one record seen from two sides, and the trustee's accounting is an export rather than a reconstruction. The estate planning page shows how trusts and entities sit together.
Often yes, but it is a related-party transaction: check the trust instrument for self-dealing rules, document the decision as a prudent investment, use a promissory note with interest at least at the AFR, and consider beneficiary consent for an irrevocable trust.
While you are alive and the trust is a grantor trust, the interest nets out on your own return if the LLC is also disregarded to you. It still must be documented and booked on both sides, because the trust becomes a separate taxpayer at your death and the note becomes an estate asset.
At least the applicable federal rate for the term. For an irrevocable trust, a below-market loan to a beneficiary's company can be treated as a gift or a distribution.
The note, the decision record, the payment schedule with interest and principal per payment, the balance at each period end, and evidence of how missed payments were handled. A beneficiary can demand this accounting at any time.
The note is an asset of the now-irrevocable trust or the estate, valued at its balance, and the LLC's obligation to repay is part of the LLC's value. A documented, tracked note passes cleanly; an undocumented one becomes a dispute or a tax problem.