Residents of Florida who have a trust set aside for a family member or a trust in their name may want to do some research before filing for bankruptcy. While filing for bankruptcy can give someone a fresh financial start, it can sometimes affect a trust fund. Since bankruptcy usually involves liquidating assets to pay creditors, a trust could be used to pay off someone’s debt.
The way to tell if a trust would be vulnerable during a bankruptcy is determined by what type of trust it is and who has control of it. With a revocable trust, the person who created the trust has control over the assets until they pass away, even if someone else is named as the beneficiary. Therefore, if someone has a revocable trust in their name, but they did not create it and the person who did is still alive, it would not be affected by bankruptcy. However, if they did create the revocable trust, it could be liquidated to pay creditors.
On the other hand, an irrevocable trust is one where the named beneficiary is in control of the assets. If someone creates an irrevocable trust, they can file for bankruptcy without the trust being impacted; however, if the beneficiary of this type of trust files, the assets may be used to eliminate an individual’s debt.
It may be a good idea for someone considering filing for bankruptcy to speak with an attorney. An attorney could help someone understand what is involved in the filing process and what assets are and are not protected in their state.
Source: Fox Business, “Is a Trust Untouchable in Bankruptcy?,” Justin Harelik, April 9, 2013