Does a Trust Protect Assets in Bankruptcy?

Trusts and Bankruptcy

Trusts are popular in the asset protection industry and many promote them as a way to remove your name from your assets and prevent creditors from gaining access to them. But do they really change the rights afforded to creditors?

Not as much as you might think.

First, it’s important to understand how trusts work.

A trust is created while you are alive and provides benefits during your lifetime and to your loved ones once you are gone. You are free to unwind the trust (if it’s revocable) or extract whatever assets you choose from the trust at any time.

The most significant benefit of a trust is that it enables loved ones to avoid the probate process. The trust determines who gets what assets and makes the settling of your estate simpler once you’re gone.

Putting assets in the trust makes them appear to no longer be yours personally but instead a part of the trust. It makes sense that many people would assume this provides protection from creditors and means debt collectors won’t be able to reach those “trust-owned” assets to collect on a debt.

But the truth is the trust changes nothing in terms of your exposure to creditors. If the trust is revocable and you have the power to revoke it in any way, the assets in the trust are subject to creditor’s claims. When you complete your bankruptcy paperwork you’ll need to list the assets in the trust just as you would any other asset.

What about an Irrevocable Trust?

Irrevocable trusts are different than revocable trusts, but not as much as you might want them to when it comes to protecting assets from creditors.

As the name implies, in an irrevocable trust you do not have the power to move assets out of the trust at will. You have less flexibility, but you gain additional protection.

But does this protection mean you can circumvent the bankruptcy process and avoid having your assets taken by a creditor?

Not necessarily.

One of the reasons for this is timing. If you put assets into or take assets out of a trust too close to filing for bankruptcy it can be viewed as a fraudulent transfer.

Laws protect creditors who have claims at the time a trust is funded and those filing for bankruptcy cannot defeat creditor claims by giving their property to a trust. If you receive nothing in return for the transfer of an asset into a trust, it is considered a fraudulent transfer.

Laws in your state and federal bankruptcy laws include restrictions on how long a fraudulent transfer can be challenged by creditors. State laws and the rules of the trust will also govern the right of creditors to be paid from an irrevocable trust.

To learn more about the differences between revocable and irrevocable trusts, check out this information from Legal Zoom.

The important thing to remember is that there are no shortcuts and only limited ways to protect assets from creditors. The best thing you can do is work with an experienced bankruptcy attorney who understands exemptions and knows how to manage assets and risks when filing for bankruptcy. Trying to manipulate or outsmart the system will likely do nothing more than getting you in trouble. This doesn’t mean that trusts aren’t a valuable asset planning tool. It just means you shouldn’t try to use them to trick creditors.

If you’d like to know more about bankruptcy or want to speak to someone about the details of your specific situation, contact the Law Office of Robert M. Geller at (813) 254-5696 or schedule a free bankruptcy consultation at one of our convenient office locations..