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Faith, Ledyard & Faith, PLC dba Faith Law
Faith, Ledyard & Faith, PLC dba Faith Law

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How does bankruptcy affect my estate plan?

You have made your estate plan, but then circumstances change, and you find yourself facing bankruptcy. Bankruptcy can have significant implications for your estate plan, potentially affecting the distribution of your assets and the execution of your wishes.

When you file for bankruptcy, your assets become part of the bankruptcy estate, which is administered by a trustee appointed by the court. Understanding how this impacts your estate plan is crucial.

The impact of bankruptcy on your estate plan

Here are several ways bankruptcy affects your estate plan:

  • Asset distribution: Your estate plan may have outlined specific instructions for the distribution of your assets upon your passing. However, in bankruptcy, these instructions may be superseded by the priorities set forth in bankruptcy law. Creditors typically have priority over beneficiaries named in your estate plan, meaning they may receive payment before any distributions to your heirs.
  • Exempt vs. non-exempt assets: In bankruptcy, certain assets may be classified as exempt, meaning they are protected from being liquidated to pay off creditors. Your estate plan may have included provisions to protect specific assets through trusts or other mechanisms. Understanding which assets are exempt under bankruptcy law and how they align with your estate plan is essential.
  • Beneficiary designations: If your estate plan includes trusts or beneficiary designations, these arrangements may be affected by bankruptcy proceedings. For example, if you have named beneficiaries who are also creditors, there may be conflicts of interest that need to be resolved through the bankruptcy process.
  • Timing: The timing of your bankruptcy filing in relation to your estate plan is also important. If you file for bankruptcy after creating your estate plan, any transfers or changes made within a certain period before filing may be subject to scrutiny by the bankruptcy trustee. This is to prevent fraudulent conveyances or transfers of assets designed to shield them from creditors.

With these effects in mind, it is important to seek legal guidance when facing bankruptcy and its potential impact on your estate plan. This will help you better ensure that your estate planning goals are still met to the extent possible.


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