Will Creating A Trust Protect Property From Bankruptcy?

There are a lot of creative ways to protect your assets from creditors, or even from being taken by a bankruptcy court. One way that you may hear advertised, is to put all your money or property into a trust. Then, the logic goes, the property is owned by the trust and not you, and voila! You file for bankruptcy, and everything you previously put into the trust is safe.

Except that’s not exactly the way it goes.

Creating Trusts

It is true that property that you put into a trust, is legally owned by the trust and not by you. That can provide some measure of creditor protection, in certain circumstances. But the problem is that you, as the trust creator, are still the legal owner of the trust, and you still have some measure of control and ownership over the trust property.

In other words, you may not legally own the property you put into the trust anymore—that’s owned by the trust–but you do own the trust, and that’s an asset that has to be disclosed on your bankruptcy paperwork.

Still, certain kinds of trusts can be helpful, and can play a role in advanced bankruptcy planning. To understand how, it’s important to understand a little about the kinds of trusts you can use.

Revocable and Irrevocable Trusts

A revocable trust is a trust that you create, where the property will be distributed to whomever you designate, upon your passing.

As the name implies, you can eliminate or revoke the trust at any point. You can modify the trust, alter its terms, or dissolve the trust entirely.

And while that control is great for you normally, and provides maximum flexibility and control, it’s not good for bankruptcy protection. Because you still control the trust, it is yours for bankruptcy (and asset protection purposes, even outside of bankruptcy) purposes, and must be listed in your bankruptcy paperwork, and can potentially be taken by the bankruptcy Court.

An irrevocable trust is where you create the trust, but you have no control over it. You will designate a separate trustee to do that. You can’t just modify the trust, or control who gets what whenever you want to.

Many people don’t like these kinds of trusts because of the lack of control and the permanency, but for bankruptcy, they are protected and somewhat safe—if they were created before you knew or had any idea that you were going to have to file for bankruptcy, and if you didn’t move items in the trust, after you already knew you had creditor claims against you.

That makes the timing of the creation of these kinds of trusts, an important issue. But if they were timed properly, these kinds of trusts cannot be taken by the bankruptcy court or trustee.

Contact the Boca Raton bankruptcy attorneys at the Law Offices of Stephen Orchard at 561-455-7961 today for help planning your bankruptcy in the best way possible.

Sources:

law.cornell.edu/wex/bankruptcy_estate

stjohns.edu/sites/default/files/uploads/bank-research2014-09-corkery.pdf