Does a Living Trust Affect Credit?

by Tom Streissguth
Bankruptcy courts may consider living trust assets

Bankruptcy courts may consider living trust assets "available" for creditors.

Thinkstock Images/Stockbyte/Getty Images

With a trust in place, you can pass your estate to your heirs outside of probate court. A "living" trust is created while a grantor of the trust is still alive. Once the trust is in place, a trustee manages the assets per your instructions. A grantor can name himself as trustee, and can transfer any property he wishes to the trust. Although a living trust can be useful in estate planning, it also carries a few implications for the grantor's credit.

Protect your loved ones by a legally binding will. Make a Will Online Now

Revocable Trusts

If a living trust is revocable, a grantor can change its terms at any time, or revoke it altogether. The grantor can transfer bank accounts, investment accounts, real estate, or a business into the trust by retitling the accounts and the property in the name of the trust. But he can also remove those assets from the trust, name new beneficiaries, and remove others. Legally, and for tax purposes, the grantor remains in full control of the trust assets.

Loans and Credit Accounts

A grantor who has credit card accounts, a mortgage, secured loans or any other type of borrowing must continue paying those obligations as agreed. Since a revocable trust gives the grantor full access to its assets, the trust can be used to make payments on any credit accounts; the grantor can also use an individual account to meet the obligations. Creditors also consider trust assets as available to the grantor for the payment of claims and judgments.

Trusts and Lenders

Applying for a mortgage or a business loan can require reporting income and available assets, such as savings accounts and investments. Assets placed in a revocable trust, as well as income received from the trust, can be reported on a loan application, and a lender may consider them when making the approval decision. In addition, the trust itself may contract a loan. Before offering a loan, the lender may ask to review the trust document and have the trustee, or an attorney, certify that the trust meets legal guidelines.

Bankruptcy and Living Trusts

If financial problems arise, and bankruptcy looms, it's important to remember that available assets in a living trust may not be protected from the bankruptcy. If you are a trust grantor, a bankruptcy trustee in a Chapter 7 might seize the trust's cash and investments, for example, to pay your creditors. Similarly, a Chapter 13 trustee may consider the assets "available" for use in a repayment plan. However, if you are only the beneficiary of a living trust -- not the grantor or trustee -- you have no direct control over the assets, which would not be considered part of your bankruptcy estate. The situation is reversed with an irrevocable trust -- a beneficiary may have some say in changing the trust, while a grantor has none; the bankruptcy court will act accordingly.