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Can a Trust Protect My Assets if I Declare Bankruptcy?

Posted on in Bankruptcy Attorney
Can a Trust Protect My Assets if I Declare Bankruptcy?

A trust can protect your assets if you have to declare bankruptcy, depending on the type of trust you have. Assets in revocable living trusts can be seized by an individual's creditors if he or she files for Chapter 7 bankruptcy. Assets in an irrevocable trust cannot be seized. This is because of the difference in the assets' ownership in each of these trust types.

Generally, individuals set up trusts to keep their assets out of the probate process upon their deaths. A trust allows an asset to transfer directly to a beneficiary without subjecting it to the costs and complications of probate, the legal process of determining beneficiaries and transferring a deceased individual's assets to them. Individuals also sometimes create trusts to lower their beneficiaries' estate tax burdens. Below are deeper explanations of each type of trust and what can happen to the assets contained within if you file for bankruptcy. For further information about each type of trust and how it can benefit you, speak with your financial adviser or your bankruptcy lawyer.

Revocable Living Trusts

A revocable living trust can be modified by the individual who opened the trust at any time, for any reason. This includes the right to close the trust. For the rest of your life, the assets contained in a revocable living trust are your property, which means that they can be seized by a creditor if you file for bankruptcy.

There are numerous benefits to opening a revocable living trust, such as the control you retain as the owner of one. However, you cannot count on this type of trust to protect your assets from seizure as part of the bankruptcy asset liquidation process.

Irrevocable Trusts

Unlike assets in a revocable living trust, assets in an irrevocable trust are no longer the property of the individual who opened the trust. This type of trust is quite rigid with regard to how the assets contained within are handled. Once an individual opens an irrevocable, he or she cedes control of the assets and may not modify the terms of the trust or the assets within. Modifications can only be made by the beneficiary once he or she gains ownership of the trust.

Because assets in an irrevocable trust are not actually the property of the individual who opened the trust, they cannot be seized in a bankruptcy proceeding.

Work with an Experienced Libertyville Bankruptcy Lawyer

If you are considering filing for bankruptcy, first put together an inventory of all of your assets to determine each asset's value and location. If you have assets in a trust, include this in your inventory spreadsheet. Then, speak with an experienced bankruptcy lawyer about what you can expect from the bankruptcy process regarding all of your assets. To get started, contact our team at Newland & Newland, LLP to set up your initial consultation in our office. We serve clients in the North Chicago, Fox Lake, Zion, Winthrop Harbor, Waukegan areas from out our office located in the prestigious 180 North LaSalle street building in Chicago.

(image courtesy of Dodgerton Skillhuase)

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