Personal Bankruptcy: How Does it Affect a Trust? - Westgate Law

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Personal Bankruptcy: How Does it Affect a Trust?

When a trust is thrown into the mix, a personal bankruptcy can take on a whole different appearance. First and foremost, it is essential that you are aware of who is in control of the trust assets. Although you are able to file bankruptcy on your own, having an attorney to walk you through all the ins and outs could possibly prevent those trust assets from being jeopardized. For example, the trust may have a “spendthrift” provision which limits creditor claims to trust assets even when the trust is irrevocable or the grantor has died.

In a revocable trust, a trust beneficiary does not immediately control the trust assets, but instead is waiting to receive something from the trust. The trust creator (also known as the trust grantor) can alter or terminate any aspect of the trust in question. Usually children and/or family members are stated as the beneficiaries of a trust. The trust grantor remains in total control of all assets until his death. The beneficiaries cannot affect the grantor’s activities/use of the trust assets.

Once the grantor has died, legal claim to the trust assets generally goes to the beneficiaries. There could be some provisions in the trust to restrict that assess, but that is not the norm.

An irrevocable trust cannot be modified or terminated without the permission of the beneficiaries. The grantor of the trust gives up rights of ownership to assets. In an irrevocable trust, death of grantor gives beneficiaries legal rights to some portion of those assets but may not allow total access.

When the grantor of a trust has died, whether you are dealing with a revocable or irrevocable trust, it can cause difficulty for the person filing for bankruptcy protection. The beneficiaries now have legal rights to the assets or at least to part of the assets. Nevertheless, the beneficiaries are now effectively in control of some or all of the trust assets.

The assets can be at risk when filing for personal Chapter 7 bankruptcy. As with everything, there may be exceptions allowing you to still file bankruptcy and protect those assets. If you need to discuss the protection of a trust while filing for bankruptcy get in touch with the experienced southern California bankruptcy lawyers at Westgate Law. We can help you pinpoint the best plan of action.

About the Author

Justin Harelik

Justin has a singular goal: to get people out of financial distress and move them to financial stability and prosperity. He does this by combining 15 years of in-depth experience in bankruptcy, credit management, debt negotiation and student loan modifications, and he does it with both English and Spanish-speaking clients.

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