When filing bankruptcy, you’re probably concerned with safeguarding certain important assets. Will establishing a trust protect your assets from creditors? The answer will depend on several factors, including the type of trust you have. There are two types of trusts, revocable and irrevocable. Below we’ll discuss the purposes of each and how they apply when you’re filing for bankruptcy.
A revocable trust, or living trust, is the type of trust commonly used in estate planning. One of its primary purposes is to help your family avoid the stress and costs associated with probate after your death. Any assets included in this trust are not subject to probate court. This saves considerable time and hassle for the beneficiaries of your estate. The assets in the trust will be distributed according to your wishes.
While a revocable trust can be a great tool when establishing your will, it won’t help if you’re filing bankruptcy. It will not protect your assets from claims against you because you’re legally the owner of the trust and its assets. A revocable trust can be revoked or modified at any time by the settlor. Meaning that you can take assets out of the trust as needed. Because of this flexibility, a revocable trust is not helpful in bankruptcy. The bankruptcy trustee and creditors will have access to your assets, including those in the trust.
When you establish an irrevocable trust, you step aside from your assets and entrust a beneficiary to oversee them. Your rights of ownership to the assets in the trust are essentially removed. The trust cannot be modified or terminated without the beneficiary’s permission. The main benefit of this type of trust is that it basically removes the trust’s assets from the grantor’s taxable estate.
In terms of filing bankruptcy, an irrevocable trust can be beneficial. Since you no longer control these assets, they will probably no longer be considered yours. They would therefore not typically be available to creditors. It’s important to note, however, that timing could play a factor. If you’ve transferred assets when you already owed money, the court could reverse the trust. This would put assets back into your ownership and creditors would then have access to them.
A trust may or may not protect your assets when filing bankruptcy. There are probably other methods of protecting your assets that make more sense for your situation. For example, certain assets are already protected from bankruptcy in the state of Florida. These include your homestead property, qualified retirement plans, annuities, and life insurance.
Be sure to speak to a qualified bankruptcy attorney if you’re filing bankruptcy and are concerned with protecting your assets. Contact the law offices of Parker & DuFresne, P.A. at (904) 733-7766 if you’re filing bankruptcy in the Jacksonville area. Our attorneys have decades of experience in bankruptcy law and can help you determine the best way to protect your family’s assets.
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