An Inheritance From Trust Is Asset of Estate
Posted: Thu Sep 18, 2014 5:22 am
I am trying to understand the 25% issue of a spendthrift trust. If dad of
debtor sets up a revocable intervivos spendthrift trust, Debtor files Bk,
dad dies 8 months later (BK still open), Debtor receives assets of the
trust, can BK trustee attach 25% of those assets? OR, can he only attach
25% of those assets if dad had died prepetition and Debtor is receiving
distributions under the trust? Or, if dad died postpetition but it's within
180 days of filing, does that make a difference?
I read the Neuton case (922 F.2d 1379 (9th Cir. 1990)) where there was a
revocable intervivos trust with a spendthrift provision where the settlor
died postpetition, within 180 days of filing (may be irrelevant?) and the
court held that 25% of the debtor's future payments under the trust are
property of the estate.
In Spencer, 306 B.R. 328 (Bankr.C.D.Cal., 2004), there was a revocable
intervivos trust with a spendthrift provision where the settlor died
postpetition, within 180 days of filing and the court found the trust at
the time of the petition date was not property of the estate. They did not
talk about the 25%.
What am I missing here?
Holly Roark
Certified Bankruptcy Specialist*
*and Sports Lawyer*
holly@roarklawoffices.com **primary email address**
www.roarklawoffices.com
Central District of California
Consumer Bankruptcy Attorney
1875 Century Park East, Suite 600
Los Angeles, CA 90067
T (310) 553-2600
F (310) 553-2601
*By State Bar of California Board of Legal Specialization
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On Sat, Sep 13, 2014 at 4:11 PM, 'Patrick Green' pat@fitzgreenlaw.com
[cdcbaa] wrote:
>
>
> I want to piggy back onto Marks comments. It is a cautionary tale for
> all. Bad facts make bad law, but equally as important is that bad pleading
> makes bad law. The underlying area of law is quite complicated. Reading a
> few cases in an experiential vacuum and then trying to make an intelligent
> argument to the court creates a garbage in, garbage out scenario. As I
> have said many times before, imagine an attorney with no or limited
> background in background reading a few bk cases and then trying to put
> together an intelligent, coherent argument about how bankruptcy law affects
> their state court matter. Unless the state court judge has a bankruptcy
> background, they have only the badly stated information that they get from
> the pleadings on which to base their decisions.
>
>
>
> If you ask 100 practitioners and/or judges who are knowledgeable about
> trust law whether the debtor created a self-settled trust under these
> facts, 100 of them would first look at you as if you had lost your mind and
> then would say no. I would also add that in my opinion, 548(e) does
> nothing more than extend the statute of limitations for a fraudulent
> conveyance action to ten years in the case of a self-settled trust which
> meets the four prong test of (e)(1).
>
>
>
> A significant part of my practice is the probate and trust areas. I have
> been trying to figure out for many years how to bullet proof my client> trusts so that creditors and bankruptcy trustees of the beneficiaries
> cannot get to the trust assets. This is what trust drafter was attempting
> to do in this case. The applicable provision of the code which would make
> this trust provision fail is 541(c)(1). This is why I have not yet been
> able to draft the bullet proof trust. It always seems to me that this
> should not apply to the gifting of property, but the plain language says
> otherwise.
>
>
>
> If you have any questions or concerns, please contact me.
>
>
>
> Pat
>
>
>
> Patrick T. Green
>
> Attorney at Law
>
> Fitzgerald & Green, Attorneys at Law
>
> 1010 E. Union St. Suite 206
>
> Pasadena, CA 91106
>
> Tel: (626) 449-8433
>
> Fax: (626) 449-0565
>
> pat@fitzgreenlaw.com
>
>
>
>
>
> *From:* cdcbaa@yahoogroups.com [mailto:cdcbaa@yahoogroups.com]
> *Sent:* Saturday, September 13, 2014 12:09 AM
> *To:* cdcbaa@yahoogroups.com
> *Subject:* Re: [cdcbaa] An Inheritance From Trust Is Asset of Estate
>
>
>
>
>
> Keep in mind the decedent died prepetition and it is the spendthrift
> clause that is being attacked. In no way shape or form does this decision
> from the Northern District of Illinois conclude that a debtor's beneficial
> interest in a trust of a decedent who died *postpetition* is an asset of
> the bankruptcy estate. The 7th circuit (Illinois is in the 7th Circuit)
> Court of Appeals determined in Matter of Newman 903 F.2d 1150
> (1990) beneficial interests in a trust arising postpetition are not
> acquired by bequest, devise or inheritance and therefore not property of
> the estate under section 541(a)(5)(A)
>
>
>
> There are a few bad facts here, but this decision is poorly reasoned
> and appears to highlight a lack of depth related to trust law and its
> underlying rationale. The debtor's mother's trust said distributions were
> to be made outright once the trust was administered, but that if a
> beneficiary was or became insolvent, filed for bankruptcy, was subject to
> levy, etc before distribution, then the beneficiary's interest terminated
> and a spendthrift trust would be established for that beneficiary to be
> distributed at the trustee of the trust's discretion. The trustee of the
> trust became aware that the debtor was having financial difficulties a
> month after debtor's mother died. An additional 7 months went by (bad
> fact) before the debtor's counsel notified the trustee of the trust's
> counsel of the debtor's insolvency and intent to file for bankruptcy. She
> filed for Chapter 7 bankruptcy relief two months later. The debtor,
> through counsel, informed the trustee of the trust's counsel of
> the debtor's belief that the trustee's obligation was to invoke
> the spendthrift clause. The trustee agreed and invoked the
> clause establishing a spendthrift trust.
>
>
>
> The bankruptcy court concluded with rather contorted logic that 11 U.S.C.
> Section 548(e) applied as this was somehow a similar device to a
> self-settled trust. The Court basically assumed there was a transfer
> without analyzing the issue and focused its analysis of Section
> 548(e)(1)(A) on the similar device issue. The Court Court's analysis was
> that the debtor's counsel sending the letter to the trustee of the trust's
> counsel was in essence creating a self-settled trust and that because the
> trustee of the trust was a family member (related by marriage to debtor's
> niece) he was not exercising independent discretion. The Court said the
> debtor recruited the trustee and schooled him in his obligations under the
> terms of the trust to invoke the spendthrift clause. The Court emphasized
> the family relationship and lack of court supervision over the trust
> highlighted that it was really the debtor causing the spendthrift trust to
> be created. All this allegedly made this spendthrift trust a similar
> device to a self-settled trust. There was no acknowledgment or analysis
> of the fact that most trusts are specifically designed not to require court
> supervision, to save on the administrative burden, expense, and lack of
> privacy. There was no acknowledgment or analysis that in fact most
> trustees of trusts, including most trustees of spendthrift trusts, are in
> fact family members of the beneficiaries. The Court seemed to think these
> were badges of fraud instead of standard procedure. The Court ignored, and
> apparently so did the parties, that the settlor of the trust was the
> debtor's mother. The debtor's mother, not anyone else, created the
> trust, including the spendthrift clause, which required the trustee
> to invoke said spendthrift clause if one of the beneficiaries was
> insolvent. It was the decedent's intent that her assets were used for
> their intended purpose - the beneficiary's care. The Court and
> the parties maintained the trustee of the trust established the spendthrift
> trust. The Court found that the Debtor caused the creation of the trust,
> by her counsel's writing a letter to the trustee's counsel asserting to the
> trustee of the trust what his duties were. The Court completely failed to
> grasp that the trustee of the trust had a fiduciary duty to establish the
> spendthrift trust based upon the terms of the trust created by the debtor's
> mother once learning of the debtor's insolvency.
>
>
>
> The Court, without substantive analysis, determined that since the
> debtor's attorney wrote a letter to the trustee of the trust's counsel
> containing her legal analysis that the trustee had a duty to invoke the
> spendthrift provisions of the trust and gave a receipt of her spendthrift
> interest to the trustee, that there was thus a transfer by the debtor under
> Section 548(e)(1)((B). Mom's stated requirement for a spendthrift trust to
> be created upon debtor's insolvency trust had nothing to do with it...?
>
>
>
> The court then found the debtor intended to, hinder, delay or defraud her
> creditors under Section 548(e)(1)((C), because spendthrift trusts are
> intended to deprive creditors from access to the beneficiaries assets,
> because the debtor had alleged influence over the trustee of the trust and
> because the trustee of the trust took to long to distribute the trust
> assets. The Court just determined that the trustee of the trust could have
> made distributions earlier than he did, before the spendthrift trust was
> established. Because the trustee of the trust could have made earlier
> distributions, the Court concluded without any analysis under South
> Carolina law (trust was administered in South Carolina) that the trustee
> failed to make distributions when he should have. The trustee of the
> trust's fiduciary responsibilities were governed by South Carolina law, and
> the Bankruptcy Judge sitting in the Northern District of Illinois needed to
> analyze the trustee of the trust's conduct under that
> prism. Regardless, mom created the special needs trust. Debtor just
> asserted her legal analysis that special needs trust applies. If there was
> some shenanigans between the Debtor and the trustee of the trust taking
> things outside of the trustee allowed discretion under South Carolina
> law then I could see intent to hinder, delay, or defraud, but the analysis
> is not there.
>
>
>
> The Ninth circuit held that federal law determines whether there was a
> transfer and that state law determines whether there is a property right.
> In Re Costas 555 R.3rd 790 (2009). Obviously the Castellano case is from
> the Seventh Circuit, but I think the Court thought it was unfair for a
> spendthrift clause to trigger 8 months after a decedent's death and focused
> on the wrong issues trying to find a rationale to avoid its
> application. The Court should have analyzed the case pursuant to Section
> 541(c)(2) and determined under South Carolina law whether a trust
> spendthrift clause can be triggered after the decedent's death such that it
> changes a beneficiary's distribution rights from outright distribution to
> the assets being placed in a spendthrift trust. If not, that term of the
> trust is void and their is no spendthrift trust.
>
>
>
> Mark T. Jessee
> Law Offices of Mark T. Jessee
> "A Debt Relief Agency"
> 50 W. Hillcrest Drive, Suite 200
> Thousand Oaks, CA 91360
> (805) 497-5868 (805) 497-5864 (Facsimile)
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>
> In a message dated 9/12/2014 6:33:29 P.M. Pacific Daylight Time,
> cdcbaa@yahoogroups.com writes:
>
>
>
> Ive attached an article about the Castellano case from ND Illinois.
>
> The bankruptcy court included a debtors vested trust inheritance in the
> estate, despite the spendthrift clause.
>
> Gerry McNally
>
> [image: McNally Bus Card Smaller]
>
> Gerald McNally
>
> McNally & Associates, P.C.
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I am trying to understand the 25% issue of a spendthrift trust. If dad of debtor sets up a revocable intervivos spendthrift trust, Debtor files Bk, dad dies 8 months later (BK still open), Debtor receives assets of the trust, can BK trustee attach 25% of those assets? OR, can he only attach 25% of those assets if dad had died prepetition and Debtor is receiving distributions under the trust? Or, if dad died postpetition but it's within 180 days of filing, does that make a difference?I read the Neuton case (922 F.2d 1379 (9th Cir. 1990)) where there was a revocable intervivos trust with a spendthrift provision where the settlor died postpetition, within 180 days of filing (may be irrelevant?) and the court held that 25% of the debtor's future payments under the trust are property of the estate.In Spencer, 306 B.R. 328 (Bankr.C.D.Cal., 2004), there was a revocable intervivos trust with a spendthrift provision
where the settlor died postpetition, within 180 days of filing and the court found the trust at the time of the petition date was not property of the estate. They did not talk about the 25%.What am I missing here? Holly RoarkCertified Bankruptcy Specialist*and Sports Lawyer
holly@roarklawoffices.com**primary email address**
www.roarklawoffices.com
Central District of California
Consumer Bankruptcy Attorney
1875 Century Park East, Suite 600
Los Angeles, CA 90067
T (310) 553-2600
F (310) 553-2601
*By State Bar of California Board of Legal
Specialization
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