Q: What happens to assets & property in a revocable trust upon the trustor's death if in the process of bankruptcy?
My mother just passed away. She has a revocable trust, of which I am trustee/executor, state of AZ. She was in the process of filing bankruptcy but did not officially file with the court yet. What are my responsibilities as trustee? Do the beneficiaries have a right to the proceeds from the sale of her assets/property or will it be attached by the creditors? Can I as her daughter bear any financial obligation? What happens to the outstanding debts that are in default? Should I contact her bankruptcy attorney or is there no point now that she has passed away?
A: Yes, you should immediately contact your mother's bankruptcy attorney and advise this person of her death. You are best advised to seek a consultation with an Arizona wills and trusts that attorney regarding your responsibilities and duties as trustee of her trust which is no longer revocable upon her death.
David Luther Woodward agrees with this answer
A: Sincere condolences to you. I suggest you talk with your mom's trust attorney or a trust attorney in your area to confirm what needs to be done. You can also contact your mom's bankruptcy attorney to discuss the issues but since the case has was not yet filed, a bankruptcy cannot be filed for a person who has passed away. The trust attorney will be the best person to advise you about the creditors.
A: Since your mom did not file her petition for bankruptcy before she died, she's not in bankruptcy, but her creditors still have claims against her estate, which includes her trust. Before any assets of a trust can be distributed to the trust beneficiaries, a formal notice of death must be sent to all known creditors so that they can file their claims against the trust and/or the estate. If, after notice has been given, more than 1 year has elapsed and the creditor has done nothing to perfect its claim by the filing of a lawsuit for collection on a debt, the debt is barred by the statute of limitations (in most states). Secured creditors of course have recourse to their collateral in the event of nonpayment, such as a mortgage on a house or a lien against a car. Unsecured creditors have no recourse against specific assets until they get a judgment, and most unsecured creditors will choose to write off the debt (depending on amount and collectability). Talk to a probate attorney for specific legal advice and counsel.
I am truly sorry for your loss. Contact your mother's trust attorney asap as there are likely deadlines for notice requirements and other procedural deadlines. Since it sounds as though the trust was created in Arizona you should consult with an Arizona trust attorney. Each state has its own laws when it comes to trusts and estate distributions, noticing requirements, etc...
It is also a good idea to discuss this scenario with an Arizona bankruptcy attorney to have an idea of what bankruptcy can and cannot do.
I hope this is helpful.
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