1

A trust has recently been created for my benefit and I am the sole beneficiary. I am in Atlanta, GA if this helps for reasons of practice or procedure. The trust is irrevocable and has provisions that require the trustee to generally make disbursements on my behalf for things such as “debt obligations and general forms of indebtedness” to creditors that I may have or will have during the life of the trust.

The trustee in control of the fund has not rendered their account to me as to what the remaining extent of the trust estate is that is in his possession (principal minus his prescribed compensation, management expenses, taxes, etc). I have a copy of the original trust indenture with schedules showing what was originally granted to the trustee (I even have proof that a transfer of funds to the trustee took place and on what exact date it was received by him).

Long story short I am contemplating filing chapter 7 bankruptcy and know that I must list individual assets (i.e. my beneficial interest in the trust). I have done research and know that my personal estate becomes the estate of the bankruptcy trustee and that it will obviously get divvied up amongst creditors with claims.

My primary concern is the fact that, as beneficiary, I have a non-compliant trustee who for all intents and purposes is in breach of trust. I have yet to get access to the trust funds.

What I would like to know is if the bankruptcy trustee, once he/she succeeds to my beneficial claim after I file chapter 7, will legally take it upon themselves to enforce the trust and then liquidate it for the benefit of my creditors?

Yes, in a perfect world I could hire a trust and estate attorney to assist me with enforcing the trust and getting a substitute trustee appointed. I would then have to compensate said attorney out of the trust fund and then, after doing so, satisfy my creditors with what remains in the trust fund (a double hit to the fund). Not to mention the potentially lengthy state level civil court process involved. Whereas, by filing bankruptcy it seems I could kill two birds with one stone (have bankruptcy trustee liquidate the trust as well as satisfy existing creditors’ claims).

Will the bankruptcy trustee enforce the trust for my benefit in order to satisfy existing claims of my creditors or will I have to enforce it separately on my own?

Side Note: I am not concerned with the hit my credit report/score will take as a result of bankruptcy.

1 Answer 1

0

The trust is irrevocable and has provisions that require the trustee to generally make disbursements on my behalf for things such as “debt obligations and general forms of indebtedness” to creditors that I may have or will have during the life of the trust.

A bankruptcy trustee has the same rights that you would to access the trust. The bankruptcy trustee can also seek to have the trust dissolved if you funded it, or it is the result of a series of transfers without substantially equivalent consideration traceable to you, which are called fraudulent transfers.

The terms you describe for the trust would be very unusual terms for a trust, so I am skeptical that is says what you claim that it does. You may be misunderstanding what the exact language of the trust means.

If a trust is created by a third party with their own money, and distributions are to be made only in the sole discretion of the trustee, it is much harder for a bankruptcy trustee to access those funds.

The existence of the trust, and the pattern of distributions made or to be expected to be distributed from the trust could, in some circumstances, also be a ground for objecting to any discharge of debts you own in the Chapter 7, although the circumstances would have to be fairly extreme for that provision to apply.

5
  • Thank you for your contribution. 1) I was paraphrasing for the sake of brevity but I didn’t realize that all private trust instruments contained the same or similar language, causing one circumstance to be “unusual” from others. It is my understanding that the individualized intent of the settlor as reflected by the terms of the trust will always be unique in its own right. I also don’t see how provisions providing for the disbursement of funds to satisfy debt obligations of the beneficiary is “unusual”. A settlor may feel one is not responsible enough to just be given access to the fund.
    – Zach
    Jun 1 at 7:46
  • I get the fraudulent conveyance point you’re making (non-applicable to my case) as in the instance of making certain conveyances, without adequate consideration, with intention to avoid creditors. However, filing for bankruptcy, it would seem, would defeat the initial fraudulent intent once said trust and the source of funds is disclosed. Just doesn’t make sense to me but I understand the point. Lastly, are you saying that a creditor could object to the discharge of the debts on the basis that a trust, adequately funded, already exists for the payment of the debt in full?
    – Zach
    Jun 1 at 7:55
  • "I didn’t realize that all private trust instruments contained the same or similar language, causing one circumstance to be “unusual” from others." While in theory there are an infinite number of possibilities, for reasons driven by tax law, Medicaid regulations, and the ability of creditors of a beneficiary to make claims, and the generally uncreative nature of lawyers, there are only about half a dozen common ways to word that term (and only about two ways to word a related term that isn't expressly mentioned in the post) that account for perhaps 95% of all trusts, and with a dozen ca. 98%.
    – ohwilleke
    Jun 1 at 18:27
  • "are you saying that a creditor could object to the discharge of the debts on the basis that a trust, adequately funded, already exists for the payment of the debt in full? " Basically. 11 U.S.C. 727 law.cornell.edu/uscode/text/11/727 governs objections to discharge in its entirety as opposed to of a particular debt, especially reasons #1 and #4 at this link: natlbankruptcy.com/how-to-screw-up-your-bankruptcy-discharge Case law makes it broader than it seems on its face.
    – ohwilleke
    Jun 1 at 18:38
  • 1
    Thanks for the insight. Much appreciated.
    – Zach
    Jun 2 at 19:21

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.