Trusts can be useful tools for both asset protection and estate planning. For that reason, individuals may utilize a trust structure in starting or expanding their business and may therefore have a trust be party to an SBA loan. In the context of SBA lending, lenders should be aware that both irrevocable and revocable trusts can be eligible passive companies, and can either borrow or guaranty under an SBA loan.

                If a trust is going to be a party to an SBA loan, there are a few things that the lender should keep in mind during the due diligence process. The lender should start by obtaining a copy of the trust agreement and any addendums to the trust agreement. If state law prevents the lender from obtaining a full copy of the trust agreement, then the lender should, at a minimum, get copies of the sections of the trust agreement that pertain to the trust's ability to borrow and the required SBA certifications listed below. Sometimes, in addition to creating a trust agreement, the trustors will register the trust with the state. If the trust is registered, the lender should also get a copy of the filed registration.

The trust agreement governs the terms of the trust and contains vital information about the trust, including the identity of the grantor(s) (trustors), trustee(s) and beneficiaries. The lender should begin by confirming that the trust will not be terminated by the terms of the trust agreement before the loan maturity date. The identities of the parties to the trust are also significant for several reasons. If the borrower of an SBA loan is a trust, the grantors of the trust are required to guaranty the loan. Also, for the purposes of the SBA application, the eligibility of the grantors will determine the eligibility of the trust. The trustee acts on behalf of the trust, and is required to sign documents for the trust. Under the SOP 50 10 5(B), the trustee must certify to the following in writing:

·         That the trustee has the authority to act,

·         That the trust has authority to borrow funds, pledge trust assets, and lease the premises to the operating company,

·         That the trustee had provided accurate, pertinent language from the trust agreement confirming the above; and

·         That the trustee has provided, and will continue to provide, a true and complete list of all grantors of the trust; and

·         That the trust will not be revoked or substantially amended for the term of the loan without the prior written consent of the SBA.

As with any other type of entity seeking financing, it is imperative that a lender carefully review trust documents to be sure that there is nothing in the trust agreement that would impair the lender from recovering should there be a default on the loan. Taking these precautions, and following these guidelines, will help protect the SBA guaranty should the lender be faced with a default on a loan involving a trust.