nactownag said:

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So we're just borrowing money using the pre tax money as a collateral for the loan?

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Think of the trust as a bank. If you wanted to borrow money from the trust, the loan would have to be done just like you were borrowing money from a bank. The loan would have to be fully collateralized.

Let me use an example of you wanting to purchase some commercial real estate property. The real estate property would be the collateral for the loan. Just like a bank.

If you defaulted on this loan, the trustee would foreclose on the property. Just like a bank.

There is some flexibility in the repayment terms (interest only for a while, balloon notes, etc.). But the repayment terms must be reasonable and, in the opinion of our tax and legal team, would have to withstand the scrutiny of the IRS or other authorities.

Our attorneys create the loan documents for our trust clients. There are hard and fast rules, just like a bank. One of these rules is that the loan has to actually be repaid according to the terms of the loan document. Another rule is that the interest rate must be reasonable. We generally use the Applicable Federal Rate (AFR) that is set by the IRS each month, and the interest loan must equal the AFR.

https://apps.irs.gov/app/picklist/list/federalRates.html

I hope that clears up any confusion.

Thank you cjsag94!

Glad to keep the conversation going and constructive.

Too much is at risk otherwise.