Many parents want to pass money down to their children, even during financial hardship. Fortunately, filing for bankruptcy does not mean you have to give up the hope of leaving something for your children.
A trust may offer a way to protect family assets, but the rules can be complex. It is important to fully understand the relationship between trusts and bankruptcy so you can approach both processes correctly.
What is a trust?
A trust is a legal tool that holds property for the benefit of someone else. The person who creates the trust can place money, real estate or other assets into it. A trustee manages those assets according to the trust’s terms. If done correctly and for the right reasons, a trust may keep family assets out of reach during bankruptcy.
The timing and type of trust matter. A revocable trust allows the person who created it to take assets back or make changes. Bankruptcy courts can include assets from this kind of trust when deciding what is available to creditors. That means a revocable trust usually does not protect assets during bankruptcy.
An irrevocable trust works differently. The person who creates the trust gives up control over the assets. When the person no longer owns those assets directly, the bankruptcy court may not include them in the bankruptcy estate. However, if the court finds that the person used the trust to hide money or avoid paying debts, it may still order the assets turned over to creditors.
What should you know before creating a trust?
Oregon courts and bankruptcy trustees look closely at when and why someone created a trust. If someone placed assets into a trust while already facing debt collection or planning to file bankruptcy, the court may undo the transfer. This is a fraudulent transfer, even if the goal was to protect children.
Parents in Oregon who hope to use a trust to protect family money should act before debt becomes a serious problem. The trust must serve a legal and clear purpose beyond avoiding creditors. A properly created irrevocable trust, formed in good faith and well before bankruptcy, may allow parents to leave something behind for their children.
