A probate estate and a bankruptcy estate are two very different estates with very different rules for asset inclusion, and assets included in one could have an effect on the other. Take the example of a trust: being the beneficiary of one does not mean that finances are never an issue. Take a situation where an individual is the beneficiary of an educational trust, but what if they run into an unexpected situation involving large medical bills? Could the trust actually affect their ability to file or could the assets be included in the bankruptcy estate?
The answer to this question is of course not a yes or no answer but one that is dependent on individual circumstances and the specific terms of the trust. This is why consulting an experienced bankruptcy attorney when considering bankruptcy is vitally important, and so is working with one when creating a trust. While there is not a definite yes or no answer to the question, there are some general things to know.
The first is that the ownership interest is a large determinant of whether trust assets can be pulled into the bankruptcy estate. There are two basic kinds of trusts: revocable and irrevocable. Let’s start with irrevocable because ownership lies with the beneficiary. The assets have already been definitively transferred into the trust. A revocable trust is one in which the grantor retains the right to make changes.
How does the irrevocable and revocable nature of a trust affect bankruptcy? If a grantor retains the ability to take an asset back, the beneficiary’s interest is only an expectant one. The beneficiary doesn’t own the assets for them to be included in a bankruptcy estate determined upon assets owned by the debtor.
Another very important term to look for in a trust is whether there is a spendthrift provision. This type of provision helps protect individuals by limiting creditors’ access to the assets included in the trust.
Source:Fox Business, “Is a Trust Untouchable in Bankruptcy?” Justin Harelik, April 9, 2013
If you have questions about how a trust could affect your consumer bankruptcy case, our Tampa bankruptcy team has answers. Visit our website to learn more.
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