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Horizon Elder Law & Estate Planning Blog

Tuesday, September 11, 2018

Will My Parents' Trust Assets Be Taken if They File for Bankruptcy?

As a general rule, every asset that you own should be included as part of your bankruptcy estate. If your parents are filing bankruptcy, this rule will apply to them as well—unless they have a specific type of trust.

Children may be particularly interested in this issue because when parents file bankruptcy, it may put their inheritance at risk. With proper planning, however, trust assets may be safe from creditors, even when a parent files bankruptcy. A California asset protection attorney will be able to examine the unique facts of your situation to tell you more about trusts as an asset protection tool.

Revocable and Irrevocable Trusts

To determine whether trust assets will be administered in bankruptcy, you first need to decide which type of trust your parents are using. The amount of control they have over the trust will have a significant effect as to whether the trust assets need to be part of the bankruptcy estate.

A revocable trust is really just an extension of an individual. The trust can be altered or canceled at virtually any time. If the trust owner can take out assets and use them as they please, then the trust is likely going to be included in a bankruptcy estate.

An irrevocable trust, on the other hand, cannot be changed or canceled unless particular (and unusual) circumstances apply. In most situations, the beneficiaries have to agree to change the trust. There may also be specific language in the trust document that prohibits recipients from making changes as well. Because of this lack of control of the trust assets, the trust will generally not be considered part of the bankruptcy estate and will not be affected by your parents’ bankruptcy filing at all.

Other Savings Accounts Held for the Benefit of Children

In addition to certain types of trusts, parents may also hold other accounts for the benefit of their children. The most common example is a savings account under Section 529 of the Internal Revenue Code (often known as Section 529 Accounts). While these accounts technically hold parents’ money, they can only be used for the educational expenses of their children. Those accounts generally will not be included in the bankruptcy estate.

The same can be said about accounts that only hold gifts on behalf of children, such as where grandparents set up a savings account for their grandchildren, but the parents are administering the account until the child becomes of age.

The Role of the Trustee in Bankruptcy

Every bankruptcy filing is examined by a local or regional trustee. This trustee looks for assets that can be administered to the benefit of the creditors. Once the trustee realizes that your parents have a trust, he or she will likely take a very close look at the trust documents. If the trustee can spot any reason that the trust should not be classified as an irrevocable trust, he or she may try to liquidate it for the benefit of creditors. However, a properly created trust should not be susceptible to this type of action.

You have many tools that you can use to protect assets from creditors, even when you file bankruptcy. Contact a California estate planning attorney at Horizon Law to learn more.


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