In a recent Chapter 7 bankruptcy case in Texas, a debtor’s assets held in trust were made part of the bankruptcy estate despite the fact that the debtor never withdrew the money.
The details of the case:
The debtor was left assets in a trust by a deceased relative. The instructions of the trust said that he could withdraw money after the death of the relative (the creator of the trust) on his 30th, 35th and 40th birthdays. Since the creator of the trust did not die until after the debtor’s 30th birthday, the debtor was not able to withdraw money until his 35th birthday. However, the debtor did not take advantage of his ability to withdraw money from the trust, instead on his 37th birthday he filed Chapter 7 bankruptcy. The bankruptcy trustee ruled that the money in the trust should become part of the bankruptcy estate since the debtor had the right to withdraw the money. On appeal, the bankruptcy judge partially agreed with the trustee.
The bankruptcy judge ruled that since the debtor had the right to withdraw up to 50 percent of the assets held in the trust, that 50 percent of the trust should become part of the bankruptcy estate. For debtors who are receiving an inheritance or other distribution, not taking the distribution may not be enough to protect the money from the bankruptcy estate. If you have a trust or other type of inheritance coming, discuss this matter with your bankruptcy attorney so that your assets can be protected while you’re in the bankruptcy process.