How does an irrevocable trust work in bankruptcy?
An irrevocable trust in bankruptcy An irrevocable trust is essentially a trust in which assets have been permanently transferred to a trust with designated beneficiaries. With an irrevocable trust, the grantor has removed his or her rights to the assets of the trust and only the beneficiaries can change or modify the trust.
Can a trust file a federal bankruptcy case?
Now, back to the question of whether a trust can file a bankruptcy case. A trust that acts as a business has all of the hallmarks of a debtor. It may have an income stream from its operations that is not sufficient to meet the demands of its creditors but it generates income and has assets and liabilities.
How does a Chapter 7 bankruptcy affect a trust?
This is because nonexempt assets are generally liquidated in a chapter 7 case, but in a chapter 11 or chapter 13 the assets are not liquidated and the debtor enters into a repayment plan, which protects their nonexempt assets. If you have questions about a trust and/or a bankruptcy case, call us at 770-609-1247 to discuss how we can best help you.
Can a trust be liquidated in a bankruptcy?
Since the consumer has control over the assets as a trust beneficiary in an irrevocable trust, the assets are at risk of becoming liquidated. However, just like the situation described above, if the consumer filing for bankruptcy is also the grantor, the situation changes.
Is it possible to break an irrevocable trust?
It should not be possible to break an irrevocable trust, because only the Trustee has legal right to access the trust assets, and the trustee has a fiduciary duty to follow the exact terms of the trust. With rare exception, a person is not typically going to be trustee over an irrevocable trust that they are also beneficiary of.
Should you make an irrevocable trust?
One reason you may wish to set up an irrevocable trust is to make sure that a disabled loved one is properly cared for. Because the terms of an irrevocable trust are not easily changed, you can rest assured that this person will be provided for using the assets in the trust.
Are revocable trusts protected in bankruptcy?
A trust can protect your assets if you have to declare bankruptcy, depending on the type of trust you have. Assets in revocable living trusts can be seized by an individual’s creditors if he or she files for Chapter 7 bankruptcy. Assets in an irrevocable trust cannot be seized.
Can a revocable trust change to an irrevocable trust?
Yes , you can change a revocable trust to an irrevocable trust by doing a “restatement” that is structured correctly to provide asset protection AND with a method for accessing your stuff if you need it. But if you need government assistance before the 5 years is up, the trust won’t work for its intended purpose.