Debtor Denied Bankruptcy Exemption For Trust

September 17th, 2009 by Reed Allmand

In the bankruptcy case of Lunkes, William J.; In re, the bankruptcy court denied the debtor a bankruptcy exemption for a trust left by the debtor’s father.

The details of the bankruptcy case:

“In 2002, the debtor’s father established a trust. He was the settlor, trustee and beneficiary. The debtor and his four siblings were contingent beneficiaries. The debtor’s father died in 2003 and the debtor’s sister Patricia became trustee. Then one of the debtor’s brothers sued the trust and the other beneficiaries regarding the sale of trust property. When the debtor filed for Chapter 7 relief in 2009, the assets of the trust had not been distributed to the beneficiaries. The debtor scheduled his inheritance in the trust as an asset that was exempt pursuant to Section 541(c)(2). The trustee objected on the basis that the inheritance was not a spendthrift trust.”

The bankruptcy court upheld the trustee’s objection because although he did not receive a distribution from the trust at the time of the bankruptcy filing, he still had a right to the money. And because he gained a vested interest in the trust as soon as the father died, the trust did not qualify for the exemption. The court also said that the trust did not qualify as a spendthrift trust because the debtor had the authority to withdraw funds from the trust if he had chosen to do so. For debtors expecting an inheritance or who are in possession of a trust, please speak with a bankruptcy attorney about the trust’s exemption status.  The bankruptcy court has specific rules about how trusts are handled during bankruptcy.  If a trust does not meet the qualifications for bankruptcy exemption, it may be counted as an asset and face a possible liquidation to pay creditors.

(Consumer Bankruptcy News, Volume 19, Issue 18, page 18)