A trust is a legal relationship in which one person holds property for the benefit of another person.
Trusts were invented in medieval England so that landowners could leave the management of their estates to someone trustworthy while they left to fight wars or crusades that could go on for years.
These lords would often not come back from the wars, and so they wanted to make sure that their land was managed well, and that it would be there for their children if they died.
The trust worked well for this because the lord could appoint a talented manager who would own and manage the property, but that manager had to use the profits to help the lord’s family.
It turns out that the ability to transfer property to one person who must manage that property for another person is a very useful thing even today, though few people leave for crusades nowadays, there are still many uses for trusts in the modern world.
This article will not describe all of them, but some of the most common uses are managing inheritances, creating special needs trusts for disadvantaged family members, and for charitable giving.
WHO IS INVOLVED IN A TRUST?
There are three parties to any trust.
1. The Settlor
The settlor is the original owner of the property in question (lawyers call the property held in a trust the corpus).
He is the medieval lord who goes to join the crusades.
2. The Trustee
The Trustee becomes the new owner of the corpus. He is the manager that must take care of the property.
He is the technical owner of the property but he cannot use the property for his own benefit.
He must use the property for the benefit of the beneficiary, or sometimes for another specific purpose that the settlor chose.
3. The beneficiary
The beneficiary is the person for whose benefit the trust is created.
In the example of the lord leaving to fight in the crusades, the beneficiary is the lord’s 5-year-old son, who is too young to manage the fields.
The beneficiary does not have the right to make decisions about the estate.
For example, he cannot decide whether to plant corn or to plant wheat. The trustee gets to make that decision.
HOW DO TRUSTS WORK IN BANKRUPTCY?
When someone files for Chapter 7 bankruptcy or Chapter 13 bankruptcy, they get to keep some, but not necessarily all of their property.
As we have learned, there are two people that have some sort of ownership (lawyers call ownership a property interest) of the property in a trust: the trustee, and the beneficiary.
The settlor usually does not have a property interest anymore.
The trustee’s interest isn’t included in the bankruptcy because he only controls the property; he can’t use it for himself.
It wouldn’t be fair to the beneficiary if the trustee’s creditors could get the property in the trust.
What about the beneficiary (the person who gets the benefit of the property)?
The beneficiary’s interest in the trust is sometimes protected.
This is a complicated area of law, but the basic idea is that if the trust has a valid spendthrift clause, then the property in the trust (the corpus) does not go into the bankruptcy to be sold for creditors.
What is a spendthrift clause?
A spendthrift clause is a clause that says the beneficiary may not transfer his interest in the trust to someone else.
This is called a spendthrift clause because its original purpose was to prevent young heirs from wasting their inheritances in a few years by selling everything and burning through the cash.
Whether or not a trust, even if it has a spendthrift clause, is exempt in bankruptcy is a complicated legal issue, and you should not rely on this article to decide if your trust would survive a bankruptcy.
A good Minnesota bankruptcy attorney will read your trust documents and tell you whether or not the beneficial interest would survive a bankruptcy.
If you are thinking about filing bankruptcy, then you should not create a trust until after you have spoken to an attorney – creating a trust in the time before bankruptcy can be considered a fraudulent transfer.
WHAT TO DO NEXT
If you’re affected by a trust, either as a Settlor, Trustee or Beneficiary, and want to know more about filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota, then why not not speak to us now at 612.824.4357?
We’ll give you all the help and advice you need.
Alternatively, fill out our free Bankruptcy Evaluation Form to see if filing for Chapter 7 Bankruptcy or Chapter 13 Bankruptcy in Minnesota is right for you.
We’re looking forward to helping you.
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