As any good Estate planning lawyer can tell you, if you are facing bankruptcy, you are likely concerned about what will happen to any of the assets and property you own. For people who have set up trusts as part of their estate plan, the thought of filing bankruptcy can be particularly stressful worrying about what will happen to those funds.

When an individual files for bankruptcy, the bankruptcy court will assign a trustee who will oversee all of your assets and may be able to take those assets which are not protected in order to sell off to pay any creditors the bankruptcy filer has. Assets which are exempt from bankruptcy and are protected from the trustee may include the filer’s primary residence, retirement savings accounts, and their personal vehicle.

This may include any trusts you have set up. How those trusts are set up is critical to whether or not they are protected.

Revocable Trusts

Many people utilize revocable trusts in their estate plans set up by an estate planning lawyer. With a revocable trust, the individual setting it up maintains complete control over the trust. They are referred to as the grantor. The grantor places whatever assets they choose into the trust and then names a beneficiary who will receive those assets upon the grantor’s death.

The grantor can change the trust, add or remove assets from the trust, or revoke the trust any time they want. The beneficiary has no say at all until they actually inherit the trust.

A revocable trust is not protected in bankruptcy and the trustee can use those assets to satisfy creditors.

Irrevocable Trusts

When an estate planning lawyer  sets up an irrevocable trust, the grantor loses the freedom to access, change, or cancel the trust. When the grantor places assets into the trust, they are withdrawing any rights of ownership of those assets. They are required to name a trustee for the trust. And although the beneficiary may not able to access the assets in the trust, they are considered the legal owner of those assets.

Although the grantor has given up the flexibility that a revocable trust offers, what they gain with an irrevocable trust is protection. Since they are no longer the legal owner of any of the assets in the irrevocable trust, those assets cannot be used by the bankruptcy court to pay off any creditors the grantor has.

Fraudulent Transfers

If you are considering an irrevocable trust as a way to avoid paying creditors, it is critical to be aware of laws against fraudulent transfers and preferential payments in bankruptcy which an attorney can explain to you.

In a bankruptcy, the trustee can void most transfers made within 90 days and some made within one year as a preferential payment.

In addition, a transfer of property to deter, hinder or defraud a creditor can be a fraudulent transfer and the trustee can look back 2 years and 10 years for a self-settled trust.

Moreover, most states have a version of a Fraudulent Conveyance Act under which assets can be recovered by creditors even if you are not bankrupt.   In Connecticut, the look back period is 4 years and in New York it is 6 years. CGS 52-552 and CPLR 213.

In some states and under federal law, a fraudulent conveyance can also be subject to criminal penalties.

An attorney, like an estate planning lawyer Ridgefield CT can turn to, can assist you with the best possible legal options of protecting your assets based on the circumstances of your situation.

Thanks to our friends and contributors from Sweeney Legal for their insight into bankruptcy and estate planning law.