Hi, I have a client who is lead Trustee for a discretionary family settlement established in 2010 by their parents. The parental family home is included in the original trust fund along with some other assets.
The Trustees have granted loans to beneficiaries that purport to be secured against the future sale proceeds of the family home however the loan documentation is home made and my concern is it may not meet formal requirements for a charge or lien against land. My thoughts are to advise Trusteethey need to get the loan formalities re documented to avoid potential issues down the line.
To my question - does a precedent for a loan agreement for the type of loan described exist and where is the best source for one? Is it necessary.
Kessler’s discretionary family settlement precedent contemplates such a loan but I’m unsure whether it stands by itself as sufficient evidence for the terms of loan agreed and whether a more detailed stand alone loan agreement for the secured loan is prudent or over kill. I’m less than assured by the existing loan documentation. Your thoughts on this would be very much appreciated.
Speaking from a position of ignorance (which has never stopped me before), I don’t understand the point of the trustees lending money to the beneficiaries and securing the debts against trust property. The beneficiaries of a discretionary trust don’t have any interest in the property (so can’t provide good security) and the trustees already own it. Not the best analogy, but it sounds a little like a bank lending money, secured against the bank’s own offices.
Query whether it is even necessary. If the trustees hold the property then I would have thought that is good security in itself. If the property was sold, they could appoint/advance cash to the beneficiaries by way of waiver of the debt and enforce repayment that way.
The extant documentation seems to be based on a misconception. A loan can only be secured on property owned by the borrower. Here it is the trustees who own the legal title in the family home and because the trust is discretionary the equitable interest is floating, though at the disposition of the trustees. Until an appointment is made an eligible beneficiary has a mere spes: this is not a property right so cannot be charged, not even in equity.
It is not clear what the terms of the loan are, although they are in writing and seem likely to have evinced an intent to create legal relations. The key point is how and when the debt is repayable. If the parties all are adults with capacity they can vary the loan agreement if they choose but if any borrower refuses the trustees will have to rely on the current documentation.
Presumably the loans were originally made out of liquid trust assets and created debts receivable by the trustees. These debts can certainly be secured on property actually owned by the borrowers, if they have any, but not on trust property.
If that does not happen the trustees are in a very powerful position nonetheless. They can call in the debt, subject to its terms, and punish the borrower by never appointing capital to him. They can appoint the debt to him which will then be extinguished by operation of law through set-off and can treat that as part or whole of his prospective share. Or they could appoint the debt to one or more other beneficiaries and let them sort it out among themselves! If the trustees have the power they could simply release the debt by deed and treat the amount as appointment of capital.
A discretionary beneficiary who is disappointed has very little hope of redress against trustees provided they have not acted capriciously. If he won’t or can’t repay his debt he will not have clean hands.
Plainly all of this will be imbued to some extent by family politics and an ideal solution is one which does not sour them for the future.
As to the drafting, precedents are available in other books if not in Kessler. I would not wish to urge anyone to attempt to draft a document outside of their expertise, and while a simple loan agreement is largely common sense (interest or not, repayment, default measures) taking security is another level of know how. I had a company commercial background as well as private client but, despite my technical knowledge of land law, I would not have been prepared to take professional responsibility for drafting a charge or mortgage over land as it might have been outside my PI cover.
Thanks very much Jack and Andrew, as you both note there’s some confusion with the status of the security which I’ll only be able to get to the bottom of by taking further instructions. I’ll do that and may be back for further advice hopefully with some clarity.
Hi, I’ve today received further instructions from the client and can therefore now add the following to our earlier exchanges.
Loans to beneficiaries (beneficiaries being the settlors grandchildren) are not provided out of trust assets at all but from a Third party. That third party being the spouse of the lead Trustee.
Whilst my client agrees the beneficiaries of this discretionary trust don’t have any interest in the property (so can’t provide good security), the trustees have, it is said (though I await documentary evidence), agreed to be guarantors to the Third party for the interest free loans they’ve authorised be given to the beneficiaries secured against the family home via the Trustees.
I’m told the Trustees consider they have powers to charge trust property under paragraph 3.7(b) of the 1st edition of the STEP provisions and power to act as guarantor under 4.7i(2) of the 2nd edition of the same.
These powers do seem to be included in the trust deed and subsequent Trust documents signed by the parties.
I am rather intrigued by the apparent assertion by the trustees that both the 1st and 2nd Editions of the STEP Provisions apply to the trust.
I have not seen any trust containing more than just one of the STEP Provisions and, mindful of the tensions between the two editions, wonder if the trustees have correctly understood the content of the trust instrument.
Best wishes to all for 2026
Paul Saunders FCIB TEP
Independent Trust Consultant
Providing support and advice to fellow professionals