Yes, many family trusts can lend a child or grandchild money to buy a home, as long as the trust document allows it and the loan is set up the way a careful lender would set it up. With 30-year mortgage rates above 7 percent this fall, a loan from the family trust at the IRS minimum rate can make a home affordable that would otherwise be out of reach, with the interest paid back to the trust.
Below: how trust loans work, the duties a trustee has, and the choice many families face: should the trust lend the money, or own the home itself?
Start with the trust document
Every trust is governed first by its own terms. Pennsylvania law says the trust instrument generally controls, and the state’s prudent investor rules apply “except as otherwise provided” by it.
So the most useful question for your estate attorney is simple: does our trust expressly allow the trustee to make loans to beneficiaries, and on what terms? If it does not, the attorney can tell you whether beneficiary consent or court approval is the safer path.
Revocable or irrevocable makes a big difference
| Type of trust | Who is really lending | What it means |
|---|---|---|
| Revocable living trust | The parent who created it | While the trust can be changed, the trustee’s duties run to the parent. In practice, this works much like a parent’s own family loan. |
| Irrevocable trust | The trustee | The trustee owes duties to all the beneficiaries, so the loan has to be fair to everyone, not just the child who borrows. |
For tax purposes, many family trusts are grantor trusts, meaning the parent reports the trust’s income on their own return. Interest the child pays such a trust is reported by the parent. Since 2025, Pennsylvania follows the same approach for its personal income tax, under Act 64 of 2023.
A trustee’s duties, in plain terms
A loan from an irrevocable trust is a trust investment, and Pennsylvania law holds the trustee to a few clear duties:
- Prudence. The trustee must invest as a prudent investor would, weighing liquidity, taxes, and the beneficiaries’ needs.
- Impartiality. The trustee must treat the beneficiaries equitably. That does not mean identically, but a soft loan to one child should be accounted for fairly against the others.
- Loyalty. When the trustee lends to a close relative, such as their own child or a sibling, Pennsylvania law presumes a conflict of interest unless the trust document allows it, the beneficiaries consent, or a court approves.
How a well-built trust loan looks
- A signed promissory note with the amount, rate, and repayment schedule.
- An interest rate at or above the IRS applicable federal rate (AFR) for the month the loan is made. The family loans guide explains the AFR and shows recent figures.
- A recorded mortgage on the home, so the trust is protected and the child may be able to deduct the interest if they itemize.
- Real payments, made on schedule, with records the trustee keeps.
What can go wrong
- Payments stop and nobody collects. The IRS may treat the missed amounts as distributions to the child.
- The loan is forgiven. Forgiveness can create taxable income or gift consequences.
- Other beneficiaries feel shortchanged. An informal loan to one child can create family tension and, in some cases, a claim against the trustee.
None of this is a reason to avoid a trust loan. It is a reason to document it carefully from the first day.
Owning versus lending
| Trust owns the home, child lives there | Trust lends, child owns the home | |
|---|---|---|
| Protection from the child’s creditors or divorce | Generally stronger, if the trust is drafted for it | Weaker; the home is the child’s, apart from the trust’s lien |
| Mortgage interest deduction | No mortgage interest for the child to deduct | The child can usually deduct it, if the mortgage is recorded |
| Capital gains exclusion on a later sale | The child generally does not get it | The child can use the $250,000 / $500,000 exclusion if they qualify |
| Growth in the home’s value | Stays in the trust | Belongs to the child |
Neither column is right for every family. A child in a high-liability profession may value protection most. A child who wants to build equity and deduct interest may prefer a loan.
Questions to bring to your estate attorney
- Does our trust allow loans to beneficiaries, and on what terms?
- Should the trust own the home, lend for it, or distribute money for it, given this child’s situation?
- What rate, security, and repayment terms should the loan carry, and what happens if payments stop?
- Is this a grantor trust for federal and Pennsylvania tax, and how will interest be reported?
- How do we keep things fair for our other children?
Where Karen fits
Karen Langsfeld is a REALTOR® and Pricing Strategy Advisor (P.S.A.) with Berkshire Hathaway HomeServices Fox & Roach. She prepares the comparative market analysis trustees often ask to see before approving a loan, and builds the settlement date around the trust’s paperwork so the loan funds on time. For the bigger picture, see the guide to helping your children buy a home when mortgage rates are high, or learn more about helping your family buy or sell a home.
Contact Karen at (215) 495-2914 or through the contact page.
This guide is general information, not legal or tax advice. Trust law and tax rules depend on your trust document and circumstances; confirm your plan with your estate attorney and accountant. Sources: 20 Pa.C.S. Chapters 72 and 77; IRC sections 671 and 7872; IRS Publication 936; Pennsylvania Act 64 of 2023.