Importance of Preserving Wealth for Future Generations

In a recent case from the United States Bankruptcy Court, we are reminded why an individual should consider keeping assets in trust for his or her beneficiaries in addition to the importance of wealth preservation for future generations.  In In Re: Castellano, 2014 WL 3881338 (Bankr. N.D. Ill. Aug. 6, 2014), the debtor was the beneficiary for a trust established by her mother.  The terms of the trust provided that upon the settlor’s death, the trust assets would be split equally among the settlor’s four children, one of whom was the debtor.  However, the trust contained a spendthrift clause, stating that if, “all or any part of the income or principal of the Trust might fail to be enjoyed by a beneficiary or might vest in or be enjoyed by some other person, then the interest of that beneficiary shall immediately terminate.” 

During the administration of the Settlor’s estate, the debtor filed for bankruptcy and sent a letter advising the Trustee of their obligation to invoke the spendthrift provision.  The Trustee agreed and held the debtor’s share in trust rather than making an outright distribution. 

The Bankruptcy Court held that the debtor effectively transferred the assets into a self-settled trust in an attempt to shield the debtor’s assets from creditors.  Consequently, the Bankruptcy Court brought the trust assets into the debtor’s bankruptcy estate, therefore eradicating most of the debtor’s inheritance. 

See Joshua Goldglantz, A Bankrupt Inheritance, Berger Singerman, Sept. 10, 2014.