Tag Archives: Estate Planning

Trust Distributions May Not Always Escape Bankruptcy

Trusts may be effective at avoiding probate, but can they be subject to other legal or financial obligations? A recent article provides an example in the context of bankruptcy.

Specifically, a beneficiary of a living trust attempted to recover assets from the trust after the creator passed away. In addition to a cabin, the trust contained about $1.8 million in assets. The trust document stated that assets would be distributed to the creator’s four children in equal shares. However, one of the children filed for bankruptcy, and creditors attempted to get at that child’s share of the trust assets.

As an attorney who focuses on estate planning knows, the issue of whether creditors can obtain trust assets often hinges on an examination of control: whether the debtor had access and control over the trust property. In the case of a living trust, the creator has access and control over the trust property during his or her lifetime. Indeed, a living trust is really a form of a revocable trust. Upon death, however, the trust becomes irrevocable, and the successor trustee must govern or distribute trust assets according to the trust document.

In this case, the trust document stated that the living trust would terminate upon the settlement of the trust creator’s estate. According to the bankruptcy court’s interpretation, settlement meant the point in time when the trustee had paid out the trust’s assets and substantially administered the creator’s estate — thus putting the trust assets within the beneficiary’s control and access.

As this post illustrates, the interaction of estate planning instruments and other laws can quickly become complex. To ensure that a creator’s intentions are fully realized, it is best to consult with an experienced attorney.

Source: Forbes, “Trust Beneficiary Checkmated By Bankruptcy Code 548(e) In Castellano,” Jay Adkisson, Aug. 11, 2014

Trusts Can Serve Many Estate Planning Goals

Readers may be uncomfortable with the idea of turning control of property and/or other assets over to a trustee, despite the much-touted benefits of trusts in estate planning. This post will attempt to put such concerns to rest.

First and foremost, estate planning must be done from the perspective of love — for one’s spouse, children and/or future generations. No one can predict when a serious accident, incapacitating illness or tragedy will strike, so it is important to have a mechanism in place that will ensure that surviving loved ones will be financially secure.

In the scenario of young children, an irrevocable trust might be an option. Through specific guidelines, a trust can set the terms by which a trustee pays interest and/or principal out of the trust to beneficiaries.  A common limitation might be preventing minor children from taking control of a trust until they turn a certain age or complete college. Trust assets managed on behalf of a minor child will most likely also be immune from the reach of creditors, ensuring that a child’s inheritance will survive until the child reaches adulthood.

In the event of tragedy, the last thing that survivors may want to think about is money. Alternatively, emotions that run high in the event of a loved one’s passing may lead to fighting among heirs. By having a trust in place that clearly allocates assets to various beneficiaries, such fighting or distress may be avoided.

As these examples illustrate, parents of young children should not delay or postpone estate planning. For more information on how to start this process, check out our firm’s website page about estate planning for parents of minor children.