If a debtor is a trustee of a trust, 11 U.S.C. § 541(a) provides that the bankruptcy estate includes the trustee’s powers granted under the trust instrument. The bankruptcy trustee has the power to step into the trustee’s shoes and exercise the trustee’s powers with respect to the trust, but this does not mean that the assets of the trust automatically become assets of the bankruptcy estate; rather, the assets in the trust remain separate from the bankruptcy estate.
However, depending on the terms of the trust, the trustee may have the power to revoke or terminate a trust, the power to amend the trust, or the power to direct distributions of funds of the trust. Therefore, these powers could allow the bankruptcy trustee (acting in place of the original trustee) to obtain access to the trust assets, particularly if the trust assets could be made available to the debtor. Additionally, when the trustee and beneficiary are the same person (and are the debtor in a bankruptcy case), the legal protections of the trust are “merged” into the sole trustee and beneficiary, making the debtor the sole beneficial "owner" for purposes of the bankruptcy code.
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ReplyDeleteThe power to amend a trust is clearly a very sensitive power that one's estate planning attorney should carefully explain and discuss with clients. There are ways to structure and limit such powers as the circumstances dictate to avoid disrupting the grantor's intent in creating the trust in the first place. This is one example of why a trust is such a delicate document that it should be custom-tailored to each individual's unique needs by an attorney who practices regularly in this area of the law.
ReplyDeleteWhat if someone has placed all their assets in a Trust and then files bankruptcy? The Trust is held in the children's name?
ReplyDeleteIn response to the question posed by Anonymous above:
ReplyDeletePlacing assets in a trust and then filing bankruptcy will not protect those assets from creditors, especially if transferred to children. There are prohibitions against transferring assets prior to a bankruptcy and the look-back period is even longer for insiders (such as family members). The bankruptcy trustee has the power to invade the trust and undo the transfers. Of course there are exceptions to every rule and you should consult an attorney regarding the specific facts of your situation.
My father just set up a trust for his estate. He put me and my two sisters as co-trustees. He has been helping support me for the last year, but he doesn't have the resources to keep on with this and take care of himself. I am just getting to the realization that my finances are completely unmanageable, and continuing to get worse due to the debt I'm incurring to get by every month. I'm considering bankruptcy. Will my being a co-trustee mean that his assets (his house) will have to be used to pay off my debts?
ReplyDeleteKim,
DeleteThank you for your Comment and Question. In most cases the trust assets will not be accessible to pay the debts of a trustee, but it sounds like you may also be a beneficiary of the trust. The terms of the trust in the trust document are going to control what risk there may be to the trust assets and what can be done about it. You should consult with an attorney in your jurisdiction who is familiar with both trusts and bankruptcy.
I've got another question concerning this. My father-in-law left farm land in a trust for my husband, his two brothers and our nephew. It's oil land,and we receive a small, but helpful royalty check each month, divided four ways among us all. The nephew has declared bankruptcy. The lawyer for his creditors is threatening to sue my husband, who's the trustee, to force him to sell our land to pay the nephew's debts. Have we any recourse or options here? The nephew's share is 1/8. We don't want to sell oil land, and are really hoping that our nephew's bankruptcy isn't going to mess up things for the rest of us.
ReplyDeleteAnonymous,
DeleteThank you for your question. Unfortunately, there are a lot more details that we would need to know to answer your question. Whether or not a bankruptcy trustee or creditor can force the sale of trust assets depends on very specific details about how the trust is designed and whether or not there is any other way to provide fair value to the debtor's creditors for a non-exempt asset. For example, it may be possible for someone to buy out the nephew's share rather than sell the land, so that his buy-out funds could then satisfy the creditors. To explore all of your options, I suggest that you and your husband, the trustee, consult with an attorney familiar with bankruptcy in your area.
I have a revocable trust for my children who are under 21 at this moment. When they turn 21 they will become co-trustees until my death. I am the sole grantor and my wife, and my brother (in case something happened to me and my wife at the same time) are co-trustees and NOT beneficiaries. My brother has experienced financial reversals and is contemplating bankruptcy. I am going to promptly remove him from the trust, is there any danger to the trust or it's assets?
ReplyDeleteI am hesitant to provide any comment on the trust risk itself because trust terms are often misunderstood or misrepresented. I suggest bringing the actual trust document to your brother's bankruptcy counsel to review and tell you whether a bankruptcy will affect the trust at all. In addition, if the grantor has reserved the right to change trustees then it may be possible (after receiving the advice of counsel) to remove the brother as trustee.
ReplyDelete