Spendthrift Trusts and Bankruptcy

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If you are thinking about filing for bankruptcy and are the beneficiary of a trust, you're probably concerned that you will lose your interest in the trust if you file. To determine whether your trust is at risk you must determine a few things. First, is the trust a valid spendthrift trust under the law of the state which governs the trust? If the trust does not contain a valid spendthrift trust clause, then it must be determined whether there is an applicable exemption that can be applied to safeguard your interest in the trust.

The law states that a trust becomes property of the bankruptcy estate, unless the trust contains a spendthrift clause enforceable under state law. If so, section 541(c)(2) of the bankruptcy law excludes the trust from the bankruptcy estate, and so it is protected. Needless to say, your bankruptcy attorney should study the terms of the trust to determine whether it contains a spendthrift clause.

Finally, your attorney must decide which state's law governs the trust to determine whether the trust's spendthrift clause was properly drafted, making it enforceable. If the trust contains a valid spendthrift clause, you can stop wondering and take comfort in knowing that you will not lose your interest in the trust.