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Can a Living Trust Be Used to Avoid Creditors In Virginia?

It is difficult to think about the end of life, but it is inevitable. This is why estate planning is such an essential step to take. Whether you have only a spouse or friend as an heir or successor, or you have a long list of people who are your “heirs” – estate planning is an absolute “must”. However, a lot of people mistake the writing of their will as the only thing they need to consider.

This is not the most efficient method of estate planning because it only considers what happens with your assets after you have died. It doesn’t, necessarily take into consideration such issues as incapacitation, probate, debt, etc.

This is why (according to the Estates and Trusts Section Council of the Maryland State Bar Association and the Register of Wills Association of Maryland), one of the most common questions asked is “can a living trust be used to avoid creditors”? Though their answer is for the state of Maryland, it applies to those in nearby Virginia too, and the answer is: “NO”.

Creditors and Living Trusts

If you die with outstanding debts, you have “creditors”. As such, those creditors can make a claim against your estate. However, there are ways that claims can be blocked. For example, take the following quote:

“A grantor may place a spendthrift clause in a revocable trust so that a beneficiary’s interest in the trust cannot be attached by the beneficiary’s creditors.” (Estates and Trusts Section Council et al, 2004)

Now, what does this tell us? Quite simply it means that the trust can indicate that the heir’s creditors cannot come after these funds – however, the assets will be accessible to the creditors of the individual who has died. So, your creditors will always be able to make a claim against your estate.

Additionally, this same publication goes on to explain the hazards of looking to block claims by putting assets into a trust:

“…a revocable trust provides no additional protection from creditors, In fact, when a person dies with a will, creditors have six months from the date of death to make a claim against his or her estate, while the statue of limitations for making a claim against a trust is three years – and it is not always clear when the three-year period commences.”

So, the trust does not create any sort of protection from creditors, but there are a few exceptions to how this works. For example, married people often share ownership of a home. This home is then considered an asset, but when owned in “tenancy by the entirety” (meaning that it is held by both people), a creditor is usually unable to pursue a surviving spouse for settlement of a debt through liquidation of that asset. In “plain speak”, the creditor cannot say “well, you both owned that house and so I want to put in a claim on the deceased’s share in order to satisfy the debt”. This would not “fly” per state law, but if the pair had split the property and transferred their shares into living trusts – it would allow the creditor to pursue a claim.

Is this still confusing? To many people it is a less than clear issue. This is why you must create a sort of “to do” list for yourself and put “create a revocable trust” as the second item. The second? Not the first? No, the first is to find an estate-planning attorney who is going to be able to go over all of your specific issues and needs. They’ll understand how best to deal with issues such as creditors, debts, jointly held assets, wills, and more.

Works Cited