When New Jersey residents consider filing for bankruptcy, one of the things they should evaluate before filing is whether or not they have any trusts. This is important because some trusts can be used to pay creditors during a bankruptcy. Therefore, even if someone has gone through estate planning to set aside money for his or her heirs, this money may be up for grabs if he or she files for bankruptcy.
There are two main types of trusts: revocable and irrevocable. A revocable trust is one in which the person who has created the trust still is in control of the funds, even if they are set aside for another individual. Irrevocable trusts are no longer under the financial control of the individuals who created them, and the only person who has rights to the funds in the trust is the person or persons the trust was designated for. Therefore, if someone is filing for bankruptcy, he or she would want to set up an irrevocable trust so that the funds he or she has set aside for someone else are protected.
On the other hand, if someone has a trust for which he or she is the assigned beneficiary, it is better for the trust to be a revocable trust. Even though the money has been set aside for that individual, he or she has no control or rights to it until the originator of the trust passes away.
For those who need sound advice on the best way to distribute their assets when they pass on, contacting a New Jersey estate planning attorney may be helpful. The attorney could help them draft legal documents that would be most beneficial to their heirs and protect important assets.
Source: Fox Business, “Is a Trust Untouchable in Bankruptcy?,” Justin Harelik, April 9, 2013