General Benefits of Living Trusts

Considering General Benefits of Living Trusts

If an individual does not designate specific trust property in a living trust to pay debts and taxes at the time of death, the trustee has the authority to designate which trust property will liquidate those obligations. The question of whether the trust assets are protected from the claims of creditors depends upon local law. If the living trust is revocable by the grantor, most states will allow the creditors access to the trust assets while the grantor is alive. In addition, if a conveyance is made to a living trust and there are unpaid creditors, the transfer can usually be voided as a fraudulent conveyance, and the creditors can reach the assets.

In some states the rules are more lenient and the courts look into the financial status of the person at the time the property is put into the living trust. The questions usually are about whether there is actual or unintentional fraud.  If the answers are no, the trust is prepared to protect against the unexpected, and a “spendthrift” provision may in fact provide protection against creditors.

Transferring real property requires the preparation and filing of a new deed. If the property is subject to a mortgage the mortgage instrument must be examined to see if the property can be transferred without adverse consequences, such as the acceleration of the mortgage indebtedness. In some situations, consent of the mortgagee may be required. Title insurance policies also should be examined to determine if there are any title insurance consequences due to the transfer. The avoidance of probate does not mean that the estate will avoid return or filing and paying estate taxes.  Someone has to collect any outstanding assets, pay debts, if there are any, and finally make distribution to the beneficiaries.

The Role of the Benefit of Income Taxation