Are Trusts Protected from Bankruptcy?

Trusts are powerful estate planning tools. They allow people to protect and distribute their assets according to their wishes. This is true both during their lifetime and after their death.

But what if you hit a financial snag? How is a trust affected by bankruptcy? Many wonder whether trusts shield assets from creditors’ claims and potential liquidation.

What do you need to know about trusts and how they may be affected by bankruptcy?

What is a Trust?

A trust is a legal arrangement in which one party (the trustor or settlor) transfers assets to another party (the trustee) to hold and manage for the benefit of a third party (the beneficiary). Trusts can be established for various purposes, including asset protection, tax planning, and providing for loved ones after death. There are several types of trusts, each with its unique features and purposes:

Revocable Trust

Also known as a living trust, a revocable trust allows the trustor to retain control over the trust assets during their lifetime. The trust can be modified or revoked at any time, and upon the trustor’s death, the trust assets are distributed to the beneficiaries according to the terms of the trust.

Irrevocable Trust

In contrast to a revocable trust, you cannot modify or revoke an irrevocable trust after establishment. People choose this type of trust because it provides potential estate tax benefits and asset protection.

Asset Protection Trust

Asset protection trusts shield trust assets from creditors’ claims. They place them beyond the reach of potential creditors. These trusts are subject to specific legal requirements. They’re only available in certain jurisdictions known for their favorable asset protection laws.

Bankruptcy and Trusts

When an individual files for bankruptcy, their assets become part of the bankruptcy estate. The bankruptcy trustee oversees this estate. The trustee’s role is to liquidate nonexempt assets in a Chapter 7 bankruptcy or oversee a repayment plan in a Chapter 13 bankruptcy to satisfy creditors’ claims.

Whether bankruptcy protects a trust depends on several factors. These include:

• Type of trust
• Applicable state and federal bankruptcy laws
• Nature of the assets held in the trust

In a Chapter 7 bankruptcy, the court considers assets held in revocable trusts part of the bankruptcy estate. They may be subject to liquidation to satisfy creditors’ claims. However, meeting certain legal requirements regarding assets held in irrevocable trusts may shield them. Asset protection trusts, in particular, offer a high level of protection from creditors’ claims. However, their effectiveness varies depending on the specific circumstances of the bankruptcy case and the laws of the jurisdiction.

In a Chapter 13 bankruptcy, the treatment of trust assets may differ based on the terms of the repayment plan and whether the trust assets are necessary for the debtor’s reorganization and repayment of debts.

Contact a Bankruptcy Attorney

The protection of trusts from bankruptcy depends on various factors. These include the type of trust, the nature of the assets held in the trust, and the applicable bankruptcy laws. Certain types of trusts may offer protection from creditors’ claims. Others may be subject to inclusion in the bankruptcy estate. If you are considering bankruptcy and have an existing trust, you should consult with a knowledgeable bankruptcy attorney. They’ll explain your options and help you develop a strategy that best protects your assets and achieves your financial goals.

If you’d like to learn more about how bankruptcy affects a trust or you’re ready to get started with filing, contact the Law Offices of Robert M. Geller at (813) 254-5696 to schedule a free consultation with an experienced attorney.