What happens to my revocable trust when I file bankruptcy?

Potentially, you lose everything you put into the revocable trust!

None of the assets in the revocable trust are protected.  It is a nice estate-planning tool, but as for asset protection from creditors and the bankruptcy trustee, it does more harm than good.   And, it creates a mess.

A revocable trust is a trust which hold property in its name that can be revoked at any time by the Grantor (the person who put the property in the trust).  It is not a permanent or irrevocable trust, because the Grantor can change the terms of the trust, amend it, or even revoke/cancel it during his lifetime.  His powers to amend/modify/revoke demonstrate that the trust is a fairly fluid thing, and if the Grantor decides he wants all of the property back tomorrow, he can simply have the trust transfer it back to himself, or he can even revoke the trust.

From a bankruptcy trustee perspective, this means that the Grantor has complete control over the assets of the trust.  Since the bankruptcy trustee steps into the shoes of the debtor when the bankruptcy case is filed and the bankruptcy estate is created, the bankruptcy trustee can revoke that trust or transfer those assets as he sees fit.

It gets even worse than that, though.  If the debtor/grantor doesn’t have his name on the title of the property, it is a very hard argument to make that there are any Utah exemptions that he can apply to that property.  For example, you transfer a home with $30,000 of equity into a revocable trust and then go bankrupt.  If your name were still on title of the home, you could claim a $30,000 homestead exemption under Utah law.  However, you’ve taken your name off of the property title and replaced it with the revocable trust’s name, and the bankruptcy trustee has a good argument that the revocable trust has no right to a homestead exemption.

That being said, if you have assets worth protecting and possibly transferring into a trust, revocable or otherwise, then bankruptcy may not be the best option for you.  This is definitely an issue you would need to sit down and discuss with your bankruptcy and estate planning attorney.  Unfortunately for you, it will probably require a healthy amount of billable time from both of them to properly answer it.

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