If you've ever come across the term "loan account" in the context of trusts, you might have wondered what it means and how it works. Loan accounts in trusts can be a bit tricky to grasp, but we're here to break it down in plain English.

What is a loan account?

A loan account is like a virtual piggy bank within a trust that keeps track of money transactions between individuals and the trust itself. It's not an actual pile of money, but rather a record of how much money you or others have contributed or withdrawn from the trust. Think of it as a running tally of financial transactions within the trust.

How can the loan account increase when I haven't actually loaned any funds?

This is where things can get a bit confusing, but it's important to know that a loan account doesn't always involve actual loans. Instead, it keeps track of the movement of money related to you, in and out of the trust. So, even if you haven't given or received a traditional loan, your loan account balance can change based on various transactions.

Example: Let's say you put $10,000 into the trust initially. You receive a monthly distribution of $1,000 and you are entitled to a profit allocation at the end of the year of $15,000. So, your loan account balance actually increases by $3,000 to $13,000, due to the fact that not all of your profit share was paid out during the year.

This means that your loan account can go up even if you didn't physically lend any money to the trust. That’s because the trust can have income or assets that it distributes to you or allows you to use. When this happens, the trust records this as a loan or entitlement to you, even though you didn't give them money.

Where did the funds in the loan account come from?

The funds in a loan account can come from several sources:

1. Contributions: When you or someone else puts money into the trust, it increases the loan account balance.
2. Income and Gains: Money earned by the trust, such as interest, dividends, or capital gains, can also boost the loan account.
3. Withdrawals: If you or someone else takes money out of the trust, it decreases the loan account balance.

Why are they sometimes different for various principals?

In a trust, there can be multiple principals or beneficiaries. Each principal might have a different loan account balance based on their individual contributions, withdrawals, and earnings from the trust.

Disclaimer

The information provided in this article does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.