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INHERITANCE AND BANKRUPTCY
IMPORTANT: THIS FIRM MAKES NO REPRESENTATIONS AS TO THE ACCURACY OR CURRENT STATUS OF ANY LAW, CASE, ARTICLE OR PUBLICATION CITED HEREIN OR LINKED TO. WARNING – SOME OF THESE REFERENCES ARE PRE-BAPCPA.
In re Costas, 06-16520, 555 F.3d 790 (2009) (BAP 9th Cir. 2008) Costas inherited $34,800, but refused to accept it and, on November 7, 2002, executed a disclaimer under Arizona law to relinquish her claims to the Trust property.
December 3, 2002, Costas filed a Chapter 7. Maureen Gaughan, trustee, sought to avoid Costas’ disclaimer of the Trust property under 11 U.S.C. § 548 as a fraudulent conveyance within a two year pre-petition. The question in this case is whether an Arizona disclaimer qualifies as a “transfer … of an interest of the debtor in property.” BAP decided “not a transfer”Arizona’s relation-back rule says that a disclaimant neither transfers nor possesses an interest in disclaimed property and thus creditors cannot reach the disclaimed interest. We hold that a disclaimer, properly executed under Arizona law, is not a “transfer … of an interest of the debtor in property” for purposes of § 548.
But see: Samson v. Spencer (In re Spenser), 22-3016 (Bankr. S.D. ILL, March 17, 2023) While the courts are split, the majority permit a trustee using the so-called strong-arm power under Section 544(b) to extend the statute of limitations to six or 10 years by stepping into the shoes of the government as a creditor with claims under the Federal Debt Collection Practices Act and the IRS Code.
Conclusion: the trustee could use the FDCPA to recover an inheritance that the debtor had validly disclaimed under state law.
In re Brown, Brown vs Barclay, BAP No. SC-17-1068-AKuS (5/21/18) BAP for 9th Circuit affirmed summary judgment entered by bankruptcy court (SD Cal.) in favor of plaintiff-chapter 7 trustee avoiding debtor’s postpetition transfer of inheritance proceeds to his brothers. Because of debtor’s bad faith, postpetition receipt of inheritance proceeds while in chapter 13 remained property of chapter 7 estate under 11 USC 348(f)(2). Because debtor’s transfers were not ordinary and necessary expenses, 11 USC 348(f)(1) did not safe harbor transfers of inheritance proceeds from estate. Consequently, postpetition transfers of property of estate were avoidable.
1. All money received (this would include cash, note added by DLD) by or payable to a surviving spouse or child on the life of a deceased spouse, parent or legal guardian, not exceeding twenty thousand dollars.
2. The earnings of the minor child of a debtor or the proceeds of these earnings by reason of any liability of the debtor not contracted for the special benefit of the minor child.
3. All monies received by or payable to a person entitled to receive child support or spousal maintenance pursuant to a court order.
4. All money, proceeds or benefits of any kind to be paid in a lump sum or to be rendered on a periodic or installment basis to the insured or any beneficiary under any policy of health, accident or disability insurance or any similar plan or program of benefits in use by any employer, except for premiums payable on the policy or debt of the insured secured by a pledge, and except for collection of any debt or obligation for which the insured or beneficiary has been paid under the plan or policy and except for payment of amounts ordered for support of a person from proceeds and benefits furnished in lieu of earnings that would have been subject to that order and subject to any exemption applicable to earnings so replaced.
5. All money arising from any claim for the destruction of, or damage to, exempt property and all proceeds or benefits of any kind arising from fire or other insurance on any property exempt under this article.
6. The cash surrender value of life insurance policies where for a continuous unexpired period of two years the policies have been owned by a debtor. The policy shall have named as beneficiary the debtor’s surviving spouse, child, parent, brother or sister. The policy may have named as beneficiary any other family member who is a dependent, in the proportion that the policy names any such beneficiary, except that, subject to the statute of limitations, the amount of any premium that is recoverable or avoidable by a creditor pursuant to title 44, chapter 8, article 1, 1 with interest thereon, is not exempt. The exemption provided by this paragraph does not apply to a claim for the payment of a debt of the insured or beneficiary that is secured by a pledge or assignment of the cash value of the insurance policy or the proceeds of the policy. For the purposes of this paragraph, “dependent” means a family member who is dependent on the insured debtor for not less than half support.
7. An annuity contract where for a continuous unexpired period of two years that contract has been owned by a debtor and has named as beneficiary the debtor, the debtor’s surviving spouse, child, parent, brother or sister, or any other dependent family member, except that, subject to the statute of limitations, the amount of any premium, payment or deposit with respect to that contract is recoverable or avoidable by a creditor pursuant to title 44, chapter 8, article 1 is not exempt. The exemption provided by this paragraph does not apply to a claim for a payment of a debt of the annuitant or beneficiary that is secured by a pledge or assignment of the contract or its proceeds. For the purposes of this paragraph, “dependent” means a family member who is dependent on the debtor for not less than half support.
8. Any claim for damages recoverable by any person by reason of any levy on or sale under execution of that person’s exempt personal property or by reason of the wrongful taking or detention of that property by any person, and the judgment recovered for damages.
9. A total of three hundred dollars held in a single account in any one financial institution as defined by § 6-101 . The property declared exempt by this paragraph is not exempt from normal service charges assessed against the account by the financial institution at which the account is carried.
10. An interest in a college savings plan under § 529 of the internal revenue code of 1986 , 2 either as the owner or as the beneficiary. This does not include money contributed to the plan within two years before a debtor files for bankruptcy.
B. Any money or other assets payable to a participant in or beneficiary of, or any interest of any participant or beneficiary in, a retirement plan under § 401(a), 403(a), 403(b), 408, 408A or 409 or a deferred compensation plan under § 457 of the United States internal revenue code of 1986 , as amended, whether the beneficiary’s interest arises by inheritance, designation, appointment or otherwise, is exempt from all claims of creditors of the beneficiary or participant. This subsection does not apply to any of the following:
1. An alternate payee under a qualified domestic relations order, as defined in § 414(p) of the United States internal revenue code of 1986 , as amended. The interest of any and all alternate payees is exempt from any and all claims of any creditor of the alternate payee.
2. Amounts contributed within one hundred twenty days before a debtor files for bankruptcy.
3. The assets of bankruptcy proceedings filed before July 1, 1987.
C. Any person eighteen years of age or over, married or single, who resides within this state and who does not exercise the homestead exemption under article 1 of this chapter may claim as a personal property homestead exempt from all process prepaid rent, including security deposits as provided in § 33-1321, subsection A , for the claimant’s residence, not exceeding two thousand dollars.
D. This section does not exempt property from orders that are the result of a judgment for arrearages of child support or for a child support debt.
In re Berryhill, 2:19-07421-BKM The Court has reviewed the party’s arguments and the case cited by Mr. Mumme, In re Royal 165 B.R. 802 (Bankr. MD 1994). In analyzing a Maryland exemption statute, the court in Royal determines that it is appropriate to distinguish an inheritance from third party obligations triggered upon a person ‘s death.
“This distinction is significant because the Maryland statute lists out various third party obligations as being covered by the statute. In contrast, ARS 33‐1126(A)(1) lists no such examples and by its wording applies to any and all monies “payable or received… upon the life of a deceased….” The Court agrees with the analysis in In Re Thiem that the Arizona statute contains nothing to suggest the source of the funds received by the beneficiary is limited to insurance pay outs, or to amounts paid from third party sources. The Court, thus, concludes that ARS 33‐1126(A)(1) applies to all monies received by way of inheritance. Accordingly, the Trustee’s objection to Debtor’s exemption is overruled”
Profit v. Savage (In re Profit), 283 B.R. 567, 576, n.12 (9th Cir. BAP 2002) After the chapter 13 trustee (“Trustee”) learned that Andrew and Marilyn Profit (“Debtors”) had acquired, postconfirmation, potentially nonexempt residential real property, she filed a motion to compel them to amend their schedules and modify their confirmed plan to pay 100% of all allowed unsecured claims. The motion was filed in the plan’s 54th month. The motion contained neither new plan provisions nor a method for recouping the asset’s cash value, which had been transmuted into another alleged homestead.
Notwithstanding these problems, the bankruptcy court granted Trustee’s motion *570 and issued its order after the 60-month plan duration had expired and all payments had been completed. Its decision was published at In re Profit, 269 B.R. 51 (Bankr.D.Nev.2001).
We conclude that plan modification contravened the requirements of §§ 1322(a) and 1329(c), which require certain plan content and prohibit a modified plan from exceeding 60 months in duration, and we REVERSE. Debtors are entitled to a discharge.
In re Dale, (9th Cir. BAP, 2/5/2014) Chapter 13 trustee, Maney, prevailed on a pre-confirmation inheritance (but post 180 days) in a chapter 13 in that it is property of the estate and must be surrendered. Debtors, Robert and Kathy Dale, appeal the bankruptcy court’s, determination that an inheritance Mr. Dale received from his, mother more than 180 days following the petition date but prior, to confirmation of a plan in the Dales’ chapter 13 case was an asset of their bankruptcy estate.
Ultimately, we agree with the analysis of the Fourth Circuit in Carroll v. Logan, and we conclude that the bankruptcy court did not err in determining that an inheritance received by chapter 13 debtors more than 180 days following the petition date but before confirmation of a chapter 13 plan and before the case is closed, dismissed or converted is property of the debtors’ bankruptcy estate.We AFFIRM.
Casey v. Steinmann (In re Downs), 18-01168 (Bankr. C.D. Calif. Nov. 17, 2020) Removing a debtor as a beneficiary of a revocable, inter vivos trust is not a transfer that a trustee can set aside. A contrary result “would turn the privacy of estate planning into a minefield for both (trust) trustees and beneficiaries,” according to Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif.
Elderly parents created a revocable, inter vivos for their nine children. Evidently, the trust had substantial assets. A daughter was in financial trouble. After conferring with her, the parents removed her as a beneficiary of the trust. After the change, the daughter filed a chapter 11 petition in 2016 that was converted to chapter 7 in 2017.Chapter 7 trustee sued the parents and other siblings for fraudulent transfer.
Debtor’s death terminates future Trust distributions to bankruptcy estate.
In re Rens (Sparhawk v Davis), 20-1131 (B.A.P. 9th Cir. Oct. 29, 2021) This appeal requires us to determine the extent of a bankruptcy estate’s interest in, and—perhaps more importantly—its ability to realize upon, future distributions from an inter vivos trust. Cheri Lee Hubka Sparhawk, in her capacity as Trustee of the Elmer and Jeanne Rens Trust (“Trust”), appeals the bankruptcy court’s judgment ordering her to turn over to the chapter 72 trustee (“Trustee”) a portion of all future Trust distributions as they are paid to debtor Robert Duane Rens (“Debtor”). Ms .Sparhawk disputes only the portion of the judgment that requires her
to continue to turn over such distributions after Debtor’s death.
The bankruptcy court found that the bankruptcy estate’s interest in the Trust was fixed as of the petition date and thus would not be affected by Debtor’s subsequent death. It also found that the Trust did not provide for the termination of Debtor’s interest in the Trust upon his death, and, because his living issue were to take his share “by right of representation,”their share would also be subject to the same 25% deduction as applied to Debtor’s share while he was living.
We disagree with the bankruptcy court’s interpretation of the applicable authorities and the Trust documents. While the estate’s rights in future distributions from an inter vivos trust are fixed as of the petition date, the estate’s ability to realize on those rights is subject to the same contingencies that would have applied to the debtor’s right to receive distributions. Here, the Trust implicitly terminates Debtor’s interest upon his death. It provides that when Debtor dies, the distributions that would have gone to him are to be distributed in equal shares to his living issue, by right of representation. We disagree with the bankruptcy court that this provision means that distributions to Debtor’s living issue are subject to the same carveout for the estate as those paid to Debtor. We therefore REVERSE.
CONCLUSION: For these reasons, the bankruptcy court erred in holding that the bankruptcy estate would be entitled to continue receiving distributions from Debtor’s share of Trust distributions even after his death.
We therefore REVERSE in part the bankruptcy court’s judgment to the extent it requires turnover of Trust income and property (as described in paragraphs 2 and 3 of the judgment) beyond Debtor’s lifetime.