How Can Trusts Protect Assets in a Bankruptcy Case?

Trusts are legal tools that are commonly used in estate planning, but they also have relevance to bankruptcy cases in South Florida. Depending on the timing of when a trust is established, or the type of trust created, a trust may be able to protect assets in a bankruptcy case. Our West Palm Beach bankruptcy lawyers can explain in more detail.

Protecting Your Assets with a Special Needs Trust

A person who recently inherited money or won a personal injury settlement can protect those assets from creditors in the future by placing those assets in a particular type of trust for disabled adults known as a special needs trust. However, if the trust is established for purposes of preventing a creditor from recouping money or preventing those assets from being liquidated in a bankruptcy filing, the transfer of assets to the trust may be considered fraudulent.

Understanding Fraudulent Transfers

If you fund a trust for your own benefit — whether it is a special needs trust or another type of trust — it is critical to understand how Florida’s law views fraudulent transfers. You cannot attempt to transfer assets to a family member, friend, or another party before you file for bankruptcy in order to avoid having those assets liquidated. Such a transfer could be considered fraudulent. Likewise, you cannot transfer your assets to an irrevocable trust, including a special needs trust, in order to avoid the liquidation of assets in a Chapter 7 bankruptcy case.

For any individual who is considering bankruptcy who has also placed their assets into a trust relatively recently, you should know what the “look back” period is for this type of transfer. While federal law allows bankruptcy trustees to look back at the two years prior to the bankruptcy filing, Section 726.105 of the Florida Statutes extends this period for four years. Accordingly, any transfer made within the four-year period prior to your bankruptcy filing could be considered fraudulent. You should discuss any such transfers with a bankruptcy lawyer in West Palm Beach.

Protecting Assets for a “Spendthrift” Beneficiary

While you cannot make certain types of transfers to benefit yourself in the period leading up to your own bankruptcy filing, you can establish what is known as a spendthrift trust for a loved one who may have financial issues and ultimately may file for bankruptcy. Spendthrift trusts are not actually owned by the beneficiary, and thus creditors cannot come for those assets, and they will not be liquidated in a bankruptcy case filed by the beneficiary. Likewise, any assets in a spendthrift trust will not count toward the beneficiary’s assets in a Chapter 13 bankruptcy case for purposes of determining the repayment plan terms.

Contact Our West Palm Beach Bankruptcy Attorneys Today

If you have any questions about protecting assets in a bankruptcy case, or transferring any assets prior to a bankruptcy filing, it is critical to seek legal advice to avoid any possible concerns about fraud. An experienced West Palm Beach bankruptcy attorney at Kelley Kaplan & Eller can discuss the details of your financial circumstances and your plans for a bankruptcy filing with you today. Contact us for more information.

Sources:

leg.state.fl.us/statutes./index.cfm?App_mode=Display_Statute&Search_String=&URL=0700-0799/0726/Sections/0726.105.html

leg.state.fl.us/Statutes/index.cfm?App_mode=Display_Statute&Search_String=&URL=0700-0799/0736/Sections/0736.0502.html