As an Austin bankruptcy attorney, I occasionally see cases where the debtor is the ultimate beneficiary of assets held by a trust. This can create complex issues, and it always is best to have professional guidance in resolving them. You do not want to expose assets to your creditors that you think are protected by a trust.
Someone may have set up for you what is called a “spendthrift” trust. For example, a family member with money to bequeath upon his or her death may make some of that available to you, but under the absolute control of an independent trustee. This instrument, for example, is often used to allow offspring to reach an age where they are deemed capable of managing their own affairs. You don’t necessarily have to be a runaway spendthrift, but this is a term of art that must be carefully defined in the trust documents. Laws and specific trust language requirements vary by state. If documented properly, these assets will be preserved after a Chapter 7 proceeding. The underlying theory is that you do not have any “control” over them and do not have the power to disburse them to your creditors.
You should also know that there are both revocable an irrevocable trusts. In a revocable trust, you as a beneficiary really have no control over the assets until the grantor dies. At that point those become your assets and can become part of your bankruptcy estate. In an irrevocable trust, the grantor has given up all ownership and influence over the assets in the trust. There may be provisions that limit your access to the assets, as in the spendthrift concept discussed above. If these are very correctly documented, you may be able to protect them from creditors.
Trust documents are generally the province of highly specialized estate planning lawyers. As a bankruptcy lawyer, I can spot the risks associated with trusts and develop a strategy to deal with them in a Chapter 7, but you may also require estate planning counsel to be absolutely certain your trusts are properly implemented.
I recently saw one case where a couple had put their home in a trust. This had the terrible consequence of making the home an asset of the bankruptcy estate and not eligible for the generous homestead exemption under Texas rules. I advised them to undo the trust before considering filing, but in this instance I also referred them to specialized counsel because of the risks associated with even a small mistake in the trust documents.
Suffice it to say that the bankruptcy codes don’t allow you to transfer your assets into some form of trust that you control and to wash away your liabilities separately in a Chapter 7. That is not the intent of the “fresh start” concept of bankruptcy. But, if you are fortunate to be the beneficiary of a spendthrift trust, you will get a fresher start than most. Just beware of the landmines involved in trusts and bankruptcy estates and let your counsel guide you around those.