Can You Transfer Debt Into a Living Trust?

By Valerie Stevens

A living trust is an agreement in which you transfer your assets into the ownership of the trust. You can retain control of those assets by naming yourself as trustee until your death, at which time a successor trustee takes over and distributes your assets to your beneficiaries. While you cannot transfer debt into a living trust, creditors might be able to reach the assets in the trust during your lifetime and after your death.

A living trust is an agreement in which you transfer your assets into the ownership of the trust. You can retain control of those assets by naming yourself as trustee until your death, at which time a successor trustee takes over and distributes your assets to your beneficiaries. While you cannot transfer debt into a living trust, creditors might be able to reach the assets in the trust during your lifetime and after your death.

Creditor Access

Whether or not your creditors may be able to access your trust assets depends on your level of involvement in the trust's management. If you named yourself as trustee of your living trust, while you retain control of the assets, you have little protection from creditors. Upon your death, your successor trustee may be responsible for paying your debts before distributing the trust assets. If you owe more than the value of the trust assets, your beneficiaries may get nothing from the trust.

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How to Title Assets for a Trust

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Living Trusts & Bank Accounts

You can place your bank accounts and other assets in a living trust so they bypass probate when you die. Avoiding probate generally saves time and money for the beneficiaries of your estate. You must physically change the titles of your assets from your individual name to the name of your trust for them to skip the probate process upon your death.

When Does a Testamentary Trust Will Go Through Probate?

When you die, many of your assets will have to go through probate before your estate’s representative can distribute them to your beneficiaries. Probate is the process whereby a representative for your estate gathers your assets, pays your creditors and distributes your remaining property under the terms of your will. Whether your will gives these assets directly to your beneficiaries or places them in a trust, your assets must go through probate.

How to Execute a Living Trust

A living trust allows a person known as a trust grantor to place his assets under the administration of a trustee, who then distributes these assets to trust beneficiaries as instructed by the grantor in the trust deed. The main advantage of a living trust is that since it is prepared while the grantor is still alive, it allows the grantor's property to pass to his beneficiaries, both before and after his death, without the expense and delays of probate. The administration of a living trust involves challenges, responsibilities and potential legal liability.

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