How a Trust Can Be Affected by a Bankruptcy Proceeding

Estate Lawyer

If you are facing the possibility or inevitability of bankruptcy, you may be wondering if the assets you’ve placed into a trust will be safe from creditors’ reach. The laws regarding financial obligations to creditors and estate planning tools are subject to changes according to changes in legislation, which underscores the importance of turning to a trust lawyer for guidance. Allow a trust lawyer to help you as well, by addressing your concerns and questions as well as providing the quality legal guidance you need in order to make informed decisions about your financial future.

Understanding the Nature of a Revocable Trust

There are several types of trusts available from which to choose, and a revocable trust is the most common. A revocable trust, otherwise known as a living trust, is created during the person’s life rather than after their passing. That person is referred to as the settlor. Once it is created with the assistance of a trust lawyer, ownership of the settlor’s assets is transferred to the revocable trust. However, a revocable trust enables the settlor to terminate the trust should they choose to do so at some future time. It also provides the settlor with the flexibility to withdraw any or all of the assets from the trust at any time and for any reason.

Another reason for the popularity of revocable trusts is that when the settlor passes away, the assets owned by the trust do not have to pass through probate. This is a huge advantage for the heirs as it saves them time and money. Just as with a will, the settlor will determine who should inherit which assets from the trust upon the settlor’s death.

Though a revocable trust can be created by nearly anyone, persons who are entering into the sundown phase of their life, or who have become incapacitated, may enjoy the maximum benefits from having this estate planning tool in place.

Creditors and a Revocable Trust

With a revocable trust, the settlor retains final say on which assets are contained with the trust, and controls the acquisition or sale of each asset, and retains the power to revoke the trust. Because of this retention of control, the law deems those assets as accessible to creditors in the event of a bankruptcy on the part of the settlor. Though there may be an exception to this rule in your case, it is best to consult a trust lawyer to confirm whether or not you are required to include the trust assets as your property during the bankruptcy proceeding.

Creditors and an Irrevocable Trust

An irrevocable trust offers less flexibility in some ways than a revocable trust, but because the settlor cannot access the trust’s assets, those assets will be protected from creditors. However, and this is important to understand, if an individual anticipates filing for bankruptcy (or litigation) then they cannot transfer their assets to an irrevocable trust. If they violate the laws pertaining to this, they may be found guilty of what is referred to as a fraudulent transfer. In advance of forming an irrevocable trust, talk to a trust lawyer to determine if this is the right choice for you.

Call a law firm to learn more about trusts and asset protection by discussing your case with an estate lawyer in Phoenix, AZ.

Thanks to Kamper Estrada, LLP for their insight into estate planning and trusts involving bankruptcy.