If you are considering filing for bankruptcy but have assets you want to protect, you may be asking yourself if you can transfer assets into a trust prior to filing bankruptcy. Trusts comes in a few varieties and are either revocable (also known as a living trust) and irrevocable trusts. I had the chance to discuss this topic on 1150AM KKNW and you can listen to that show here:
You may have heard in books or through friends that it is always advisable to have a trust since you are putting your assets into the name of a trust and therefore your assets will be protected from creditors by doing so since the assets are not in your name anymore. Unfortunately putting assets into a trust prior to filing for bankruptcy may not be sound advice.
If I can’t Protect Assets in a Trust while Bankruptcy Planning. Why Have a Trust?
Avoid Probate: If your assets are transferred into a trust prior to passing away, that asset may be able to avoid having to be administered in a probate case after your pass away. This allows your beneficiaries to administer your asset without having to get a court approved personal representative appointed to your case to have power to transfer or liquidate an asset. In Washington State the probate process is not too complicated and expensive, but having a trust can help to streamline things.
Privacy: Just like having a business, if an asset such as real estate is in the name of a trust, it may make it harder for 3rd parties to search public records to determine what assets you have in your personal name. Also, when somebody passes away, a trust is not filed with the court and remains private as a opposed to a will which will be public for anybody to see.
Hard for Creditors to Find You: If you have an asset in the name of a trust, as discussed above, it may be harder for a creditor to determine where you have assets and difficult to place a judgment lien on the asset since it is not in your name.
A trust is not for everybody and does require some maintenance in terms of costs of transferring assets or having to transfer assets out of a trust if you need to refinance a loan or for other loan purposes. A trust can also have it’s own bank accounts to make payments and manage as well.
What is a Revocable Trust? (Also known as a living trust)
A revocable trust is a trust document in which the settlor (creator) can revoke at any time. In essence the settlor is not actually giving away control of the assets placed in the trust. A living trust is likely the most common type of trust.
What is an Irrevocable Trust?
An irrevocable trust actually transfers assets permanently into the trust you create and you can never transfer the assets back to your name. This type of trust may have tax consequences since you are actually giving an asset away unless consideration is paid. It is also possible that under this type of trust you do not have control over your assets.
What Happens If I Transfer Assets into a Trust Prior to Filing for Bankruptcy?
This is a loaded question, but if you transfer your assets into a trust prior to filing bankruptcy, a bankruptcy trustee appointed to your case will first look to see what type of trust you have and next look to see if the transfer you made was a fraudulent transfer.
If you have a revocable trust, then in essence, you still have control over an asset and can simply place the asset back into your personal name and therefore a trustee can step into your shoes and accomplish the same task. Therefore, a revocable trust will be of no value to you to protect an asset of your in a bankruptcy context.
If you have an irrevocable trust that you created prior to filing for bankruptcy, a bankruptcy trustee will look to see if the transfer you made was fraudulent based on state law and the bankruptcy code to avoid paying creditors. In general, if you gave away your assets and received no value in return, this may be a fraudulent transfer. In general, I would advise waiting a minimum of 2 years from making a transfer out of your name to a beneficiary for no value and up to 10 years if you transferred your asset to a trust and you are the beneficiary per 11 U.S.C. §548. Be sure to also check your states law on fraudulent transfers. In Washington state you can review the state laws under RCW 19.40.
If you live in Washington State, and have questions about whether you can transfer assets into a trust prior to filing bankruptcy, give Symmes Law Group a call at 206-682-7975 or contact us to get the counsel you need.