When it comes to establishing a trust, many individuals opt to create a subordination agreement. This is a legal document that outlines the relationship between the trust and any other parties that have an interest in the assets held by the trust. By creating a subordination agreement, trust creators can ensure that their wishes for the distribution and management of assets are upheld, while also respecting the rights and obligations of other parties.
So, what exactly is a subordination agreement in trust?
In simple terms, a subordination agreement is a legal agreement between the trust and any other parties that have a claim to the assets held by the trust. This can include lenders, creditors, or beneficiaries of other trusts that may have been established by the trust creator. Essentially, the subordination agreement establishes the order of priority for these parties in the event that the trust assets are distributed or sold off.
For example, let’s say that John creates a trust that holds a vacation home. However, John has also taken out a mortgage on the home, and the mortgage lender has a claim on the property. To ensure that the trust assets are distributed according to his wishes, John may create a subordination agreement that establishes the order of priority for the mortgage lender and any other parties that may have a claim on the property.
In this scenario, the subordination agreement would likely establish the mortgage lender as the first priority when it comes to receiving payment from the sale of the property. However, the agreement may also outline the rights of other parties, such as John’s children or other beneficiaries of the trust, in the event that there are any assets left over after the mortgage has been paid off.
It’s important to note that subordination agreements can vary widely depending on the specifics of the trust and the parties involved. In some cases, the agreement may establish multiple levels of priority, depending on the circumstances. For example, a trust that holds multiple properties may have separate subordination agreements for each property, with different parties taking priority based on their relationship to each property.
Overall, subordination agreements in trust are an important tool for ensuring that the wishes of the trust creator are upheld while also respecting the rights and obligations of other parties. By working with an experienced attorney or legal professional, trust creators can ensure that their subordination agreements are legally sound and effectively protect their interests and those of their beneficiaries.