Beneficiaries of Revocable Living Trusts Facing Bankruptcy
So you are a beneficiary of a recovable living trust. You need to file bankruptcy. Can you? Well, it depends. 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.