When you set up a trust, you transfer property and assets from yourself to the trust and to the management of a trust custodian. The purpose is to ease the often complicated process of leaving property to your heirs after your death. The law allows a trust to convey its assets to beneficiaries without going through probate court. Important provisions in trust law also deal with the issue of your personal debts.
You create a trust by drawing up a trust document, to which you convey your property, including assets such as homes, land, cash, investments and business interests. You name a trustee (who can be yourself), as well as beneficiaries of the trust who will inherit the trust assets upon your death. Many people rely on the guidance of financial and estate planners or an attorney who has experience in creating trusts, but the service is also available from online legal document providers.
The trust to which you have conveyed your assets has legal title to them. Homes, land and accounts are no longer in your name -- rather, the trust becomes the owner. The trustee has responsibility for managing the assets in the trust and for handling the trust according to its instructions, both before and after your death.
If you pass away with valid debts still outstanding, your estate becomes liable for those debts. Creditors may file a claim with a probate court for repayment, unless you have drawn up a will with instructions on how the will's executor should repay any debts. If this process does not satisfy the debts, the probate court can order liquidation of your assets in order to pay them.
State laws vary on the subject of trusts and debt. Most will allow creditors with valid debts to file claims (if necessary) against revocable trusts -- those that can be changed during the grantor's lifetime. Some also protect the assets of irrevocable trusts, which the grantor cannot revoke or change. Trusts always remain subject to federal and state inheritance taxes, but your personal debts must be repaid first out of your personal property, which does not include anything legally conveyed to the trust.
A trust grantor is free to arrange for the repayment by the trustee of personal debts out of trust assets. A trust that includes such instructions would have the trustee liquidate assets or simply write checks from trust accounts in order to satisfy these debts. However, this is a voluntary provision and not one required by law. A trust is not a public document unless it is recorded by a clerk of court, but the law does require notification to creditors of the death of a debtor. The notice allows creditors a limited period of time within which to file any claims against the estate and any trusts of the deceased.
A trust created for the specific purpose of avoiding debts may be subject to a charge of "fraudulent conveyance." A creditor may sue on this basis, asserting that the grantor knew, or should have known, about pending legal action for the repayment of a debt and moved assets to the trust to protect them from seizure. This can result in a judgment in favor of a creditor and a forced liquidation of assets out of a trust for repayment.