A trust is a legal arrangement designed to look after assets for other people. One or more people are designated as trustees who are legally responsible for holding assets placed into trust by another individual call the settlor. These assets may include money, land, buildings, investments, shares, or valuables. They are placed into trust for the benefit of one or more people called beneficiaries.
Trusts are established for several reasons including controlling and protecting family assets. When an individual is incapacitated or too young to handle financial affairs, a trust may be established. In England and Wales, a trust may be set up under the inheritance rules applicable to an individual who dies without a valid will. A will trust is designed to pass along assets or money when the settlor dies, according to the terms of his or her will.
When an individual dies in debt, these financial obligations are not written off. Under certain circumstances, creditors of the deceased may seek repayment. If the deceased had a living trust that named another individual as the trustee of the estate, that person must notify all creditors of the death and may need to repay outstanding debts using the trust. In some situations, a relative may need to cover the debts, although a certain level of protection may be available.
A living trust takes effect when the settlor is alive and upon the death of this individual, included property is transferred to the trustee, who distributes it to named beneficiaries. Cash assets including money earmarked for beneficiaries are typically used to repay debts of the deceased. If there is not enough cash to cover these debts, the trustee may sell other assets such as cars, homes, and valuables to raise additional money for debt repayments.
In most cases, creditors may only seize assets of the deceased and the estate is the only entity responsible for paying the outstanding debts of this individual. However, if another person served as co-signer on a loan, that individual could be required to repay the balance. The same rule applies to other written agreements that guarantee payment for debts that cannot be covered by the estate. With a joint account such as a credit card or mortgage, the surviving account holder becomes solely responsible.
Different debts are paid off in different ways. A joint tenant in a rental property is responsible for repaying rent arrears. If life insurance was required to cover a mortgage, this may repay the mortgage balance. Individuals still living in a home owned by the deceased are responsible for ongoing water rates, council tax and rates, and fuel bills.
Debt advisors and trustees offer guidance regarding repayment of debts held by the deceased. In general, these debts must be cleared before beneficiaries of the trust receive any payment. In certain situations, such as a joint loan, a survivor may be required to repay the debt. If a home is jointly owned and there is not enough other money to repay deceased debts, the property may need to be sold.