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A trust is not a legal person. It cannot own property or sign a contract. The trustee does both, holding the property on the terms of the trust deed. So when a trust takes a caveat loan, the borrower is the trustee, acting as trustee, and the property on the title is in the trustee’s name.
The deed is the first document
A trustee can only do what the deed and the law allow. Before anything else, the lender’s solicitor reads the deed for:
- a power to borrow money;
- a power to mortgage, charge or otherwise encumber trust property;
- a power to give guarantees, if the trust is guaranteeing another entity’s loan;
- any requirement for the consent of an appointor, guardian or beneficiaries;
- confirmation that the trust has not vested and the trustee is validly appointed.
Every deed of variation and change of trustee must be produced. A missing variation is the most common cause of delay on trust loans.
Who signs and who stands behind it
The trustee signs in its own right and as trustee. If the trustee is a company, its directors sign for it and are normally asked for personal guarantees. The trustee has a right to be indemnified out of trust assets, and lenders rely on that right, so the loan must be properly within the trustee’s powers and for the benefit of the trust.
Business purpose
The loan must be wholly or predominantly for business or investment purposes. A family trust borrowing to fund the trust’s business, buy an investment or pay the trust’s tax debt is business purpose. A trust borrowing so a beneficiary can renovate their home is not.
Common complications
Property held by an individual as trustee, where the title does not show the trust. A trustee company that has been deregistered. A unit trust where unitholder consent is required. Borrowing by one entity against property held by the trust, which needs a guarantee power and a real benefit to the trust. These are all solvable, and they are covered in more depth in can a trust borrow against property it owns and on the loans to trusts page.
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What does the lender look for in the trust deed?
A power to borrow, a power to mortgage or charge trust assets, a power to give guarantees if needed, and no clause requiring consent that has not been obtained. All variations to the deed must be supplied.
Do beneficiaries have to sign?
Not usually for a discretionary trust. Some lenders ask adult beneficiaries or the appointor to acknowledge the loan, depending on the deed.
Can a self managed super fund get a caveat loan?
Generally no. Superannuation law prohibits a fund from charging its assets, outside a limited recourse borrowing arrangement.