What happens if my children have insufficient funds to repay a loan from my Trusts?

What happens if we make a loan from a trust to a beneficiary, and they have insufficient funds to repay that trust?

At the end of the day, it doesn't matter. It just means that the trust loses out. If somebody dies, and they owe the trust £500,000 and they've only got £400,000 in their total estate, then effectively the trust loses out by £100,000.

If you think about it, there's no real difference to giving the money directly to your children. But the way that we're doing it carries massive protection benefits by utilizing the loan. Effectively, the answer is: If there are insufficient funds, it doesn't matter because the trustees are the family anyway.

Generally speaking, when you leave money to one of your children and they have insufficient money to pay the trust back, the only people who are then not getting those funds are your grandchildren. But they wouldn't get those anyway, because your children didn't have enough money to repay the trust. Whether the money went directly to your grandchildren or went to the trust and then to your grandchildren makes no difference if there are insufficient funds, so it has no negative impact whatsoever. But having the loan agreement in place carries an awful lot of protections and therefore is well worth doing for the vast majority of people. Practice has not shown a single instance where it's not worth doing.