Does a Living Trust Affect Credit?

By Tom Streissguth

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.

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.

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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.

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Requirements in Illinois for Revocable Living Trusts
 

References

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The Advantages of Changing a Bank Account Title to a Living Trust

A living trust, which is created during the grantor's lifetime, is an estate planning tool used as a holding area for many types of property, including bank accounts, real property and personal property. The grantor, the legal term for the person who creates the trust, can set up his own trust using an online legal document provider or he can hire an attorney to set up the trust. Retitling property in the trust's name, which is known as funding a trust, is a necessary step in creating a functioning trust. A bank account titled to a trust has benefits during the grantor's life and at his death.

How to Change the Trustee of an Irrevocable Trust

A trust is a legal device that allows you to place your assets under the care of a trustee for eventual distribution to beneficiaries you select. An irrevocable trust is a trust that you may not unilaterally revoke because the trust assets no longer legally belong to you. However, under certain circumstances it is possible to replace the trustee of an irrevocable trust. Although state laws differ somewhat on the procedure for replacing a trustee, the basic principles are the same in every state.

Can You Transfer Debt Into a Living Trust?

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.

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