Childrens' Trust in Chapter 7 Bankruptcy

Parents establish an irrevocable trust for the benefit of their children and primarily for educational purposes. The parents serve as trustees. One of the children has special needs. Family friends want to help the parents out financially. Rather than give the parents money, the friend contribute money to the trust. Soon after the friends contribute money to the childrens’ trust the parents file Chapter 7 bankruptcy. The parents asked me whether any part of the trust could be claimed by the bankruptcy trustee.

Based on these facts, and assuming the trust has standard form language, I do not think any part of the trust is subject to the trustee or other creditors. The parents have stated a valid reason for creating an irrevocable trust other than shielding money from creditors. Recent contributions to the trust by friends are not fraudulent transfers because the transfers were by people other than the debtors. The parents’ control over the trust as trustees does not make the trust assets their property as long as the parents are not potential income or principal beneficiaries.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida