Beneficiaries of Revocable Living Trusts Facing Bankruptcy

Posted by on Apr 17, 2012 in Chapter 13 Bankruptcy Issues, Chapter 7 Bankruptcy Issues | 18 comments

So you are a beneficiary of a recovable living trust.   You need to file bankruptcy.   Can you?   Well, it depends.  Generally, as long as you are not the settlor and the settlor lives through your bankruptcy, your beneficiary interest is contingent, meaning it doesn’t come into your bankruptcy as property of the estate.   That’s because if the settlor is still alive, that person can always amend the terms of the trust and exclude you as a beneficiary.

Imagine if you filed a chapter 7 bankruptcy, which typically lasts between 4-6 months.   During the course the chapter 7 trustee wanted to pull your contingent interest as a beneficiary into the bankruptcy estate.  Well, the settlor would more than likely just change the terms of the trust and write you out immediately as a beneficiary.  The chapter 7 trustee would be out of luck.   The settlor did not engage in fraud in writing you out of the trust; there is nothing improper in doing so.   However if the settlor was deceased or became deceased during the course of your bankruptcy, the beneficiary interest is no longer contingent and might become part of the bankruptcy estate where applicable.

However, you must analyze the entire trust document and any and all amendments and determine if there are any provisions that may say otherwise or have an adverse or different effect.

It is not a simple black or white answer and requires some real analysis and effort to properly determine.

18 Responses to “Beneficiaries of Revocable Living Trusts Facing Bankruptcy”

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