How do I determine if a Special Needs Trust protected from creditors when I'm filing for bankruptcy in the near future?

Asked almost 4 years ago - Gaylord, MI

I established a special needs trust a few years ago. I just funded it with $7500 at the top of this month. I need to declare chapter 7 bankruptcy in the near future. How do I determine if my $7500 protected from credit card debts during bankruptcy, in this case? And, my special needs trust was set up by a lawyer. Should there have been a special wording used in the trust to describe the protection over creditors I may have?

Attorney answers (5)

  1. Francis N. Soave

    Contributor Level 10

    Answered . When you transfer property (money) before filing bankruptcy, there is a very high level of scrutiny by the chapter 7 trustee. If you didn't receive full value for the transfer, the trustee may claim it is a fraudulent conveyance.

    However, there are other concerns, and opportunities, with your situation. The amount of $7,500 is not, in many cases, an excessive amount in reference to available exemptions. Your bankruptcy attorney may be able to protect the amount in the trust with exemptions.

    Your description doesn't describe who is the beneficiary of the trust, or whether the trust is revocable or irrevocable, or whether it contains a spendthrift clause. You also implied, but didn't directly state, that the source of the $7,500 was from your own funds, or a gift or inheritance from another.

    All these factors would come into the analysis of whether the trust remains outside the bankruptcy estate, whether the transfer is voidable by the trustee, or whether there are available exemptions.

    Further information is required, and your best advise would be to consult with an attorney who is familiar with both trust and bankruptcy law.

  2. Dorothy G Bunce

    Pro

    Contributor Level 20

    Answered . Unfortunately, even if the Trust was solidly created, since it was created shortly before you filed bankruptcy, the Trustee can undo the transfer. In Nevada, the Trustee can look back up to 10 years to decide whether property put into a trust can be recovered by the Bankruptcy estate.

    Unless you told the lawyer who created the trust that you were planning on filing bankruptcy and that lawyer had bankruptcy experience, there would have been no way for him to know that the money couldn't be legally transfered into a trust.

    Sorry!

  3. Theodore Lyons Araujo

    Pro

    Contributor Level 20

    Answered . BANKRUPTCY PROPERTY EXEMPTIONS (Michigan Compiled Laws Annotated):

    Can use either the state exemptions below or the federal exemptions

    The State of Michigan has exempted the property and income below from seizure by the bankruptcy court to pay creditors:

    Real property: Real estate to $3,500; property cannot exceed one lot in city or town or 40 acres if rural [559.214, 600.6023(1)(h), 600.6023(3) and 600.6027]

    Personal property: Appliances, furniture and household goods, books, and utensils up to $1,000 total [600.6023(1)(b)]; clothing and family pictures, unlimited amount, and food and fuel to last six months [600.6023(1)(a)]; arms and equipment required for military use, unlimited amount [600.6023(1)(a)]; building and loan association shares up to $1,000 par value in lieu of real estate exemption [600.6023(1)(g)]; burial plots or church pew, unlimited amount [600.6023(1)(c)]; tools, implements, stock, materials, team, apparatus, motor vehicle, horse and harness used in a business up to $1,000 total [600.6023(1)(e)]; two cows, 100 hens, 5 roosters, 10 sheep, 5 swine and feed to last six months [600.6023(1)(d)]

    Insurance / Annuities: Fraternal society benefits, unlimited amount [500.8181]; disability, mutual life or health insurance benefits, unlimited amount [600.6023(1)(f)]; life, endowment or annuity proceeds, but only if policy prohibits proceeds from being used to pay creditors, unlimited amount [500.4054]

    Pensions / Retirement Plans: Firefighters and police officers, unlimited amount [38.559(6)]; retirement benefits and IRAs [600.6023(1)(k)]; legislators, unlimited amount [38.1057]; state employees, unlimited amount [38.40]; public school employees, unlimited amount [38.1346]

    Public Benefits / Entitlements: Welfare benefits, unlimited amt [400.63]; aid to families with dependent children, unlimited amt [18.362]; unemployment compensation, unlimited amt [421.30]; workers compensation, unlimited amount [418.821]; crime victims compensation, unlimited amt [18.362]; veterans benefits for war veterans, unlimited amt [35.926, 35.977 and 35.1027]

    Wages: 60% of earned but unpaid wages for head of household; otherwise 40% [600.5311]

    Miscellaneous: Business partnership property, unlimited amount [449.25]

    REQUEST: Please give this answer a "thumbs up"(below) if you find it valuable.

    Disclaimer: This answer does not constitute legal advice. I am admitted in the States of New York, New Jersey and Massachusetts only and make no attempt to opine on matters of law that are not relevant to those three States. This advice is based on general principles of law that may or may not relate to your specific situation. Facts and laws change and these possible changes will affect the advice provided here. Consult an attorney in your locale before you act on any of this advice. You should not rely on this advice alone and nothing in these communications creates an attorney client relationship.

  4. Mitchell Paul Goldstein

    Contributor Level 20

    Answered . The first answer is not true. Bankruptcy exemption planning is allowed (just do not get carried away). If you are the beneficiary of the trust, expect to lose the money. If your child is the beneficiary of the trust, the trust may be protected. You should go back to that lawyer to find out if the money is protected under Michigan law.

    [I am a Virginia-licensed attorney. This communication is intended as general information and not specific legal advice, and this communication does not create an attorney-client relationship.]

    I hope this helps. If you think this post was helpful, please check the thumbs up (helpful) tab below. Thank you!

  5. Justin Jay Watling

    Contributor Level 15

    Answered . When the Trust was created is of less importance than when you contributed funds to it. Your Bankruptcy Trustee (and your creditors) may view this as a fraudulent conveyance (it looks like it based upon the facts given) or a preference item subject to recovery by the Bankruptcy Trustee.

    I do not see and independent justification for your contribution to the Trust that would justify keeping that money from the reach of your creditors.

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