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Can trust assets be protected during a bankruptcy?

Are you considering filing for bankruptcy but are concerned about how your assets could be affected? If you have set up a trust as part of an estate plan, you may have worries of what may happen to that property due to your bankruptcy.

As an individual, when you file for bankruptcy, you will be assigned a trustee by the court. This trustee will oversee your assets and can take unprotected assets to sell off and pay your creditors. Assets that are not eligible to be used to pay off bankruptcy debts include your home, retirement savings accounts and any vehicles you own.

A revocable trust

When you set up a revocable trust, you are referred to as the grantor and you can place whatever assets you like into the trust. You will also name beneficiaries who will have the assets transferred to them at the time of your death. A revocable trust provides flexibility as you can make changes to the trust at any time while you are still alive. Be advised, a revocable trust is not protected in bankruptcy and a trustee can use assets contained in the trust to pay off creditors.

Irrevocable trust

Once an irrevocable trust is set-up, you as the grantor will lose the opportunity to change, access or even cancel the trust. Once you place assets into an irrevocable trust, you are giving up any ownership of that asset. The benefit of an irrevocable trust is that since it is removing ownership, it will take the asset off your estate which will relieve you from tax liability. An irrevocable trust also provides you protection. Because you will no longer be the owner of an asset in the trust, those assets are unable to be used to pay off creditors.

Beware of fraudulent transfers

Be careful if you think you can use an irrevocable trust to hide assets and avoid paying off creditors. There are protections in place that will watch out for this type of behavior. During a bankruptcy, a trustee can void most transfers made in the previous three months and even some made within the last year if they feel there is fraudulent activity.

If are considering filing for bankruptcy and want to know how you can best protect your assets, you should contact an estate planning expert who can provide guidance for your particular situation.

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