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Spendthrift Trust and Bankruptcy

What is a Spendthrift Trust?

A spendthrift trust is a trust that is usually created for a person who may not have any control over spending. A spendthrift clause in a trust gives the trustee the authority to decide how the trust funds may be used to benefit the beneficiary. In most situations, the creditors of a beneficiary of a spendthrift trust may not use the funds in the trust for repayment till the funds are distributed to the individual as the funds may not be under the direct control of the beneficiary.

Would a Spendthrift Trust be Exempt from Bankruptcy when Filing for a Chapter 7 Bankruptcy?

It is likely that a spendthrift trust may be exempt from bankruptcy while filing for a Chapter 7 bankruptcy, however, if the asset that is a part of the trust is sold during the filing of the bankruptcy, then it may no longer be protected and the bankruptcy court may take the money.

Are Self-Settled Spendthrift Trusts Legal in Minnesota?

The laws about spendthrift trusts may differ from state to state in the US. In most states like Minnesota, a spendthrift trust may not be set up by a settler to avoid paying his/her creditors. Such a trust would make the settler the beneficiary as well. Such a self settled spendthrift trust may be considered illegal.

Can a Beneficiary of a Spendthrift Trust change the Trustee at his/her Will?

Beneficiaries of a spendthrift trust may not change the trustee of the trust at their own will.

Would the income received from a Spendthrift Trust be Affected if an Individual filed for Bankruptcy?

In most situations, the spendthrift trust would not be affected if an individual filed for bankruptcy. However, if the individual receives any income from the spendthrift trust, then the income may be affected by the bankruptcy. The individual may have to include the income that he/she gets from the trust along with any other income while filing for bankruptcy.

Can an Individual Add a Spendthrift Clause to a Trust to prevent it from being affected by Bankruptcy?

A trust may be protected from the bankruptcy code only if it contains a spendthrift clause in it. However, this clause must be added by the individual who created the trust before he/she passed away. The beneficiary of the trust may not be able to add the spendthrift clause to a trust to prevent it from being taken away by the bankruptcy courts.

Would a Revocable Trust be affected, if the Beneficiary filed for a Chapter 13 Bankruptcy?

It is likely that the revocable trust may get affected if the beneficiary files for a Chapter 13 bankruptcy. The creditors may use the money from the trust. However, if the trust is a revocable living trust and has a spendthrift provision in it, then it may be protected from the bankruptcy court. A spendthrift provision ensures that the trust is not a part of the bankruptcy estate. It prohibits the transfer of any of the assets that are a part of the trust to the creditors.

Is there anything like a Non Grantor Spendthrift Unit Trust?

It is unlikely that there is anything like a non grantor spendthrift unit trust. In most cases, there is a regular non grantor trust. This trust is not owned by any individual.

Filing for bankruptcy can have a lot of aspects and rules that the common individual with little knowledge of the law may not know of. The spendthrift clause in trusts is just one of them. Knowing about the spendthrift trust and the spendthrift clause can help individual’s know what they may lose to the creditors and what they can protect from being lost. It can help individual’s dealing with a bankruptcy situation; deal with it in a better and educated manner.
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