There are many different types of trust agreements, and some do not allow assignment or pledging of the assets as debt collateral. Determination of whether the trust assets are available for assignment is in the legal language of the trust agreement.
A person who has a grantor-revocable trust can modify, revoke or amend the trust at any time. The grantor of this type of trust is the owner of the trust assets even though the assets are in trust name. The grantor can assign or pledge trust assets as debt collateral, which is a common occurrence.
Grantor Irrevocable Trust
If a trust created by the grantor as irrevocable, the grantor no longer qualifies as the trust owner. In these cases, the trust is usually set up in such a way as not to allow assignment or pledge of the assets for any reason. The grantor can obtain legal counsel to get a court order to change the terms of the trust to allow for asset assignment, but this is complicated and may not occur.
Irrevocable Trust for a Beneficiary
Standard legal drafting practice includes language in trusts that do not allow beneficiaries of irrevocable trusts to pledge or assign assets for any reason. This language, called spendthrift, prevents creditors of a trust beneficiary from attaching or levying trust assets for beneficiary debt. An irrevocable trust beneficiary in need of funds should determine if there is discretionary distribution language in the trust that allows for an outright distribution, rather than attempting a pledge or assignment of trust assets as collateral.
A comprehensive review of the trust agreement is required under all circumstances to determine if trust assets are available for assignment or pledge. The bank involved in the extension of credit will conduct its own legal review of the trust agreement, and make the determination as to whether they will accept an assignment of trust assets. The trustee responsible for the fiduciary management of the trust will also review the trust agreement and determine if he will allow the assignment to occur.
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