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If you are the beneficiary of a trust, and are planning to file for bankruptcy, you might be wondering if you will lose your interest to your creditors. It all depends on your trust, whether it has valid spendthrift provision under the respective state law. If so, your interest in the trust will be excluded from the estate and you cannot lose it. As per the United States’ law, the trust becomes the property of the bankruptcy estate if it does not have an enforceable spendthrift clause. Under such situations, you might lose your interest in the trust. In simple words, a spendthrift clause is a provision in a trust that prevents creditors of any beneficiary from touching the assets as long as they remain in the trust. It basically disenfranchises creditors completely even in bankruptcy. This article answers some of the frequently asked questions such clauses and their impact on bankruptcy proceedings. What will happen, if the holder of the spendthrift clause of the living trust of a family passes away?
If the holder dies, beneficiaries will get their share during the bankruptcy proceeding. If there isn’t a spendthrift clause in the trust at all then the portion of the trust remaining can be attached by the court. However, if there is such a clause, the court cannot normally take the portion that is protected by the clause. Will the spendthrift clause protect the assets after filing for bankruptcy under chapter 7?
The trust will be protected from the court if the person that files for the bankruptcy is the beneficiary that has a spendthrift provision. However, if the person with the living trust dies, the assets need to be sold before the filing. Thus, it would be too late for the court to take any money that has come after selling the asset. Would the irrevocable trust get attached to the bankruptcy trust if one of its beneficiaries files for a personal bankruptcy protection? If so, is there any time limitations?
The irrevocable trust of which the person is a beneficiary needs to be included in the petition and the petitioner has to clearly specify in the petition whether the irrevocable trust has a valid spendthrift clause or not. It would not be included as part of the bankruptcy estate if it has a valid clause and the bankruptcy trust cannot go after its assets. Will filing bankruptcy under chapter 7 affect the irrevocable trust created by a debtor soon after the death of one of his family member?
As per the law, if the irrevocable trust has no enforceable spendthrift clause as per the state law, it will be attached by the bankruptcy estate. Under such a situation, the beneficiary’s share will also be attached to it. However, if such a clause exists; it will be protected and will be excluded from the estate. A trust often will not be treated as a spendthrift trust unless the agreement contains language showing that the creator intended the it qualify as spendthrift. I am a beneficiary along with my sibling in my parent’s revocable trust in Arkansas. Will it affect the trust if I file for bankruptcy under chapter 13?
If the trust is a revocable living trust at the time the petition was filed and if it contains a valid spendthrift clause, it might not get attached to the bankruptcy estate. The asset of an individual who files for bankruptcy becomes a part of the estate that can be used to pay off the creditors. You could hire a lawyer to help you in this as each state has a bankruptcy exemption that protects certain assets from being liquidated to pay creditors. One should have right information regarding spendthrift provisions to deal with situations during bankruptcy proceedings. You can always ask a bankruptcy lawyer if you have any doubt over this issue.
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