In this article, we’ll discuss whether or not a creditor can file a claim against a living trust and what level of reach a creditor has against assets in a living trust.
For the sake of this article, we are discussing a common, garden variety revocable trust. Setting up a living trust, also known as a revocable trust, is a common part of estate planning and acts as a way for certain assets to avoid probate. Most would think that after going through all the trouble to set up a living trust that your assets are now safe within that trust. However, in Illinois if the trust grantor, also known as the settlor (the person who holds the trust, or who the trust refers to), is still alive then a creditor can most certainly file a claim against them to settle a debt and the assets aren’t any safer than if they were not in a trust. For more information on trusts, why they are important and what they do check out: What is a Trust?
The main reason most people form a trust as part of getting their assets in order in case of death and so that the assets listed in the trust can avoid probate. Upon death the revocable trust becomes irrevocable and the ability for creditors to access certain assets within the trust changes.
Why are my assets not safe from creditors with a living trust?
The bottom line is because you, the settlor, are still alive and have total control over the assets in your living trust. You can sell property move money around, give money to others, etc, etc. The name itself, revocable trust, highlights the fact that the trust can be revoked by you at any time.
Once the settlor of the living trust has died and the trust becomes an irrevocable trust the likelihood of a creditor being able to acquire those funds to pay off the settlor’s debt diminishes. However, in some instances, a living trust may include an order to pay off debt before distribution to the beneficiaries. This may be the case if the settlor knew they would have debt upon death and wished to avoid any unnecessary legal issues for the involved family members following his or her death. In any case, a creditor can still file a claim to recover debt after the trust holder’s death, but with the irrevocable trust now in effect and the appropriate decedent’s assets becoming nonprobate the creditors are less likely to be awarded any money.
Yes, as discussed in the article “Can Creditors Go After Non-Probate Assets” a claim can still be filed, which would go against the heirs and/or the estate. This usually occurs if it is believed the estate was large, and/or as fraudulent activity and assets were moved around specifically to avoid paying the debt.
Bottom line, do not assume your assets are safe from creditors just because they are in a living trust. If you have concerns about the safety of your assets while alive or after death seek guidance from a qualified professional.
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