Expert: Norma Duenas - California Bankruptcy Attorney - 3/6/2010

Question
QUESTION: Thank you for your help. My wife and I are in the process of jointly filing Chapter 7 without legal help. My wife and her siblings have an equal share in an irrevocable trust that they will come into upon the death of her father and step-mother. Her share in this is just under $500,000. Since both her parents are very healthy and only in the early 70s this is not money we will be seeing for many years. Should it still be entered as an asset? Also, we both have life insurance policies that name each other as beneficiaries. Mine is for a total of one million and hers is around $500,000. Do we list these as assets too even though they have no current cash value? We appreciate your help. Thank you.

ANSWER: 1) The irrevocable trust of which your wife is a beneficiary of needs to be listed in the bankruptcy petition. You should specify in the petition whether the irrevocable trust has a valid spendthrift provision under your state law. A spendthrift provision is a statement that protects the assets in the trust from creditors. If the trust has a valid spendthrift provision then the trust is not considered part of your bankruptcy estate and the bankruptcy trustee cannot go after the assets in the trust.

2) The life insurance policies should also be listed as an asset in the bankruptcy case. You should specify in your bankruptcy petition what type of a policy it is and the value. For example if it is a term life insurance policy with no cash value you should state that in the petition.

If you need further assistance or have further questions you may contact me through our website at: http://www.socaladvocates.com

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QUESTION: Thank you for your timely response. After reading the question I posted I realized that I said the trust was irrevocable- it is in fact non-irrevocable. Does this make a difference to the answer? Also, I should have mentioned that we live in California. Does California have a spendthrift provision? Thank you and I apologize for not including all the information in my first question.

Answer
To clarify, I am assuming that by saying that the trust is non-irrevocable that you are stating that it is a revocable trust. Generally a trust is either irrevocable, meaning that it cannot be altered or changed, or revocable, meaning that it can be altered. The answer would not change if the trust is revocable.

Clarification on spendthrift provision: In the trust documents it should have a spendthrift provision that protects trust assets from creditors. The key is not whether California has a spendthrift provision law but whether the spendthrift provision in your trust documents would be considered a valid provision under California law. Most trust documents contain this provision if they were well drafted. If you need further clarification please email me at norma@socaladvocates.com