Best Practices: Reviewing Trust Documentation in SBA Loans

Trusts are a regular feature in SBA loan structures, particularly where ownership, real estate, or estate planning considerations intersect. For lenders, that means trust documentation should never be treated as a secondary closing item. It raises core issues of eligibility, guaranty, authority, and collateral that must be addressed carefully under SOP 50 10 8, which took effect June 1, 2025, and 13 CFR Part 120.

A sound review begins with understanding the trust’s role in the transaction. In some cases, the trust is simply an owner of the borrowing entity. In others, it may be the Eligible Passive Company, the real estate owner, or the holder of assets being pledged as collateral. That threshold determination matters because it drives the lender’s analysis of who must be reviewed for eligibility, who must execute guaranties, and how the loan documents should be structured.

From there, the lender should focus on the trust documents themselves. A complete review requires the trust agreement and all amendments, or other state law compliant trust evidence sufficient to establish the trust’s existence and material terms. The operative documents should identify the trustor, all donors, the current trustee, any co-trustees or successor trustees, the beneficiaries, and the trustee’s authority to borrow, encumber assets, execute guaranties, and, where relevant, lease property to the operating company. Too often, lenders rely on a brief trust certification without confirming whether the actual trust instrument supports the transaction contemplated by the loan documents.

Special attention should then be given to the trustor. Under SBA’s Eligible Passive Company rule in 13 CFR 120.111, the eligibility status of the trustor determines trust eligibility, and all donors to the trust are deemed to have trustor status for eligibility purposes. More importantly, in an EPC structure, the trustor must guarantee the loan if a trust owns all or part of the EPC. That requirement is separate from the familiar 20 percent guaranty rule and applies regardless of the trustor’s percentage interest in the EPC. This is an easy issue to miss if the lender looks only at the ownership percentages in the entity structure and does not read the trust-specific language in the regulation.

That EPC trustor rule should be considered separately from the broader SBA guaranty framework. In the ordinary borrower ownership context, SBA generally requires guaranties from individuals and entities that own 20 percent or more of the applicant, including trusts, with the trustee signing on behalf of the trust. In a revocable trust structure, the trustor should also provide a guaranty because the trustor may retain the power to revoke or amend the trust and thereby affect the lender’s rights in the trust assets. In an EPC transaction, however, the trustor guaranty requirement is not tied to a 20 percent threshold. If a trust owns any portion of the EPC, the trustor must guarantee the loan.

Control issues should also be reviewed carefully. The lender should not assume that only the trustee matters. Beneficiaries or trustors may hold rights to remove and replace the trustee, direct investments, consent to major actions, or otherwise influence the trust’s decisions. Those rights can affect both the lender’s guaranty analysis and the practical enforceability of the loan documents. A careful reading of the operative provisions is often the only way to identify those issues before closing.

Collateral review is another essential part of the process. If real estate, equity interests, deposit accounts, or other assets held in trust are part of the collateral package, the lender must verify that those assets are actually trust property and determine exactly how title is held. The mortgage, deed of trust, security agreement, UCC financing statement, or pledge agreement should reflect that title and capacity accurately. If the collateral documents do not match the trust’s ownership structure, the lender may create avoidable perfection and enforcement issues.

Trusts are not uncommon in SBA lending, but they remain easy to mishandle when lenders rely on incomplete summaries or do not focus soon enough on trustor status, control rights, and authority issues. The better practice is straightforward: get the full documents, review the operative provisions carefully, identify the real parties in interest, and make sure the structure, including any EPC trustor guaranty requirement, is supported before the loan closes.

For more information on SBA compliance issues, please contact Ethan at 267.470.1186 or esmith@starfieldsmith.com.