Creating trusts when a family has debt

Missouri residents may be able to protect assets for the next generation in their family by setting up a trust. However, if members of the family have debt, the trust will not necessarily protect assets from seizure by creditors. A bankruptcy filing by the grantor or the beneficiaries of a trust could result in the trust being seized for repayment of debts.

Understanding the difference between a revocable and an irrevocable trust can be important when either the grantor or the beneficiaries of a trust have debt. Because a revocable trust is in the control of the grantor until they die, assets in these types of trusts will legally be considered property of the grantor during the grantor’s lifetime. The beneficiaries will assume ownership of the trust once the grantor dies.

An irrevocable trust is a trust that is not under the control of the grantor. Although the beneficiaries of an irrevocable trust may not have access to funds in the trust as soon as it is created, they are legally considered the owners of the assets in the trust. If a ‘spendthrift” provision is added to an irrevocable trust, this could protect the trust from seizure by creditors in the event that the beneficiary files for bankruptcy. A trust may also be eligible to be exempted from seizure during bankruptcy in certain circumstances.

When creating an estate plan, an individual might want to speak with an attorney about how debts might affect any trusts they would like to create. After evaluating a family’s financial situation, an estate planning attorney may be able to recommend the types of trusts that would be most beneficial for the family.

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