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Trusts and bankruptcy: some important things to know

Financial problems are something that a lot of Pennsylvania individuals and families worry about. Trusts are a common tool to help individuals or families avoid financial struggle, but some are forced to consider bankruptcy even when one is in place. Some common questions arise, including whether a trust could affect the ability to file, whether assets held in trust could be included in the bankruptcy estate or how to draft a trust that would avoid issues in the future.

These are all very valid questions with answers that depend on the individual circumstances involved in a situation, but there are a few general things to know about trusts when it comes to bankruptcy. The first issue is often over the ownership of the assets.

Whether a trust is irrevocable or revocable can affect the "ownership" consideration. If a trust is irrevocable, it means that the assets have already been transferred. The interest has been let go, and the beneficiaries own their designated interest allocations. When a trust is revocable, it means that the grantor has not yet released their ownership interest and can make the changes they see fit. When the grantor dies, the trust then becomes irrevocable.

How can this affect a bankruptcy filing? Say that the beneficiary of a revocable trust chooses to file for bankruptcy. The assets in the trust will most likely not be included in the bankruptcy estate because the ownership interest in those assets is only an expectant one -- the grantor could change his or her mind at any time.

Another important thing to know about trusts and bankruptcy is that some trusts have a clause that is called a spendthrift provision. This type of provision protects the assets by limiting a creditor's claim.

As stated above, each individual case is different. It is important to consult an estate planning attorney to understand the intricacies involved in a trust already in existence or how each little detail in the development of a trust could affect the administration of it in the future.

Source: Fox Business, "Is a Trust Untouchable in Bankruptcy?" Justin Harelik, April 9, 2013

If you have questions about irrevocable and revocable trusts, our Philadelphia attorneys provide individualized and thorough advice for any set of circumstances.

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