QUESTION

What will happen to our trust if we file for bankruptcy?

Asked on Jan 12th, 2011 on Bankruptcy - Nevada
More details to this question:
My spouse and I are contemplating whether or not to file Chapter 13. My spouse is named as one of four beneficiaries in parent's trust. My parents are not dead (quite alive and well). What will happen to the trust, if we go through bankruptcy? Will it be dissolved? Could parents be forced to sell off anything they may have or may not have put in the trust?
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Answered on Jan 13th, 2011 at 10:28 AM
Generally, as long as either of your wife's parents lives beyond 180 days of your bankruptcy petition date then none of the assets in the trust are at risk in the bankruptcy. This is because what your wife, as the beneficiary, actually owns is a future interest in the assets of the trust. The bankruptcy rules provide that this interest is only at risk if it vests within 180 days of your bankruptcy petition date. So if both your wife's parents die within 180 days of your bankruptcy filing date then her share of the assets in the trust may be at risk. Whether they are at risk within that 180 day period depends on the trust. The assets may still be out of reach of the bankruptcy trustee if there is a spendthrift clause in the trust. One purpose of a spendthrift clause is to prevent the creditors of a beneficiary from being able to attach the assets of the trust. Section 541(c)(2) of the bankruptcy code provides that a restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title. In other words, when a beneficiary of a trust cannot lose their interest in that trust to a creditor outside of bankruptcy, they are also protected when they file for bankruptcy.

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Answered on Jan 12th, 2011 at 3:43 PM
Nothing should happen as there is no ownership interest in it yet. You disclose, but it should not be able to be touched.

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Answered on Jan 12th, 2011 at 2:58 PM
Nothing will happen to the trust regardless of the type of trust. If it is a revocable living trust, as most are for the purpose of avoiding probate only, then your spouse has no right to anything until the parents die (and usually the death of both parents is required depending on the terms of the trust). Usually upon the death of the last parent the trust beneficiaries are vested in the property. That is when your wife and the other beneficiaries become entitled to the property. Until that happens the parents can change the trust at any time and take your wife out as a beneficiary. There is the issue of what happens if your wife becomes entitled to property under the trust within six month of filing for bankruptcy. One court has said that property from such trusts is not an inheritance that can be taken by the trustee to pay the debts. Other courts may disagree so that is not a clear situation if the parents were to die within six months of your wife filing bankruptcy. If the trust is irrevocable then your wife already has a property interest and that property interest becomes part of the bankruptcy estate upon her filing for bankruptcy. Therefore, unless you can exempt her interest in the property the trustee may be able to take the property at some point for payment of her debts. The valuation of the such property from an irrevocable trust is sometimes very difficult because your wife may not be able to take possession for a long time. For example, assume your parents transferred the property to your wife but kept the right to live in the property for life (this is known as a life estate). In that case your wife interest in the property before the parents die is not worth much because the parents may not die for a long time. You really need to consult with a local bankruptcy attorney and understand what kind of trust is involved before filing for bankruptcy. The bankruptcy attorney may have to review the document and even contact the attorney who drafted the trust.

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Answered on Jan 12th, 2011 at 1:58 PM
Nothing should happen to the parents' trust, assuming it is a typically family trust where the parents are the current beneficiaries and your spouse will get an inheritance when the parents pass away. The assets do not belong to your spouse, they belong to the parents. There are other types of trusts that may have your spouse as a current beneficiary, but these are not as common.

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