More than many other estate planning tools, trusts are capable of protecting a family’s assets for future generation. However, if either the person creating the trust or the beneficiary has debt, the trust will likely not be able to protect the assets from creditors. This means that if someone in the family files for bankruptcy, there is a risk that the trust could be seized for the repayment of debts.
The Difference Between Revocable and Irrevocable Trusts
The role of debt in the creation of a trust emphasizes the distinction between irrevocable and revocable trusts. A person who creates a revocable trust is in control of the trust until his or her death, which means that assets in this type of trust are considered property during the creator’s lifetime and will pass to beneficiaries after the creator’s death.
Irrevocable trusts are not in control of the trust’s creator, but sometimes a “spendthrift” provision can be added to the trust to protect it from creditor seizure if a beneficiary of the trust later files for bankruptcy.
The Advantages of a Trust
There are some distinct advantages to both irrevocable and revocable trusts. Irrevocable trusts offer the benefit of reducing estate tax, charitable estate planning, and protecting assets in bankruptcy. Another advantage is that in a large number of cases, assets placed in an irrevocable trust are protected from creditors. Oklahoma’s Fraudulent Transfer Act (24 O.S. 112), however, can come into play when a person only transfer assets into an account to avoid paying a debt.
Revocable trusts, however, let individuals avoid the probate process as well as protect their privacy. The downside to revocable trusts, however, is that when a bankruptcy schedule asks for a person’s list of assets, property that is placed in a revocable trust must be listed and can be pursued by creditors. As a result, for some people with significant debt, revocable trusts are not nearly as attractive an option as irrevocable ones.
Other Advice on Dealing with Debt After a Loved One’s Death
In addition to understanding the difference between the two types of trusts, it can also be helpful to know some additional information about how to respond when when a loved one dies with significant debt:
- While heirs often inherit a person’s assets and possessions, rarely do the survivors of a deceased individual inherit credit card balances. This, however, does not apply when a person is jointly liable for a debt. Instead, joint account holders are generally fully responsible for a debt.
- Executors of the deceased person’s estate should inform creditors about the person’s death as soon as possible. It is also important for the executor to notify the three major credit reporting companies to make sure that deceased individual’s account is marked as “deceased.”
Contact a Knowledgeable Estate Planning Attorney
If you are interested in creating a trust, the best thing to do is speak with an experienced estate planning attorney like Jim A Lyon. Contact our law firm today to schedule an initial free consultation.