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Inheritance From Parents' Revocable Living Trust Within 180 Days Is Not Captured In Debtor's Bankruptcy Estate

By Jonathan Alper

The general rule is that any property a debtor acquires after he files his bankruptcy petition is not part of his bankruptcy estate. The biggest exception to the general rule is money received as part of an inheritance or life insurance policy. All property the debtor receives by ?bequest, devise, or inheritance:? or as a beneficiary of someone?s life insurance within 180 days after the filing date becomes part of the bankruptcy estate and is taken to pay the bankruptcy creditors. The debtor gets any part of the inheritance or insurance proceeds remaining, if any, after the creditors are paid.

I assumed it did not make a difference if the debtor?s inheritance of his parent or grandparent?s money was through the probate of a will as opposed to the administration of a living trust. In the past few decades the living trust has become the primary tool to pass on an inheritance because it avoids probate. I saw a 2010 bankruptcy case that indicates that ?inheritances? from a living trust are not included in the above referenced bankruptcy definition of ?bequest, devise, or inheritance.? In other words, the case finds that when a debtor becomes entitled to money left by a deceased ancestor though the terms of a living trust the debtor?s recovery is not part of the bankruptcy estate. Apparently, several bankruptcy courts around the country have held that when a debtor becomes entitled to assets in a living trust after someone?s death the debtor?s interest was acquired by the trustmaker?s gift during the trustmaker?s lifetime as opposed to being acquired after death.

I would agree with the court analysis if the ancestor had made a lifetime gift to an irrevocable trust because the debtor/beneficiary?s interest would vest during the ancestor?s lifetime rather than upon his death, or if the ancestor?s revocable trust left the debtor an inheritance subject to a valid spendthrift provision which provisions protect money from the beneficiary?s creditors. This bankruptcy court refers decisions of other bankruptcy courts with broader holdings that, for example, payments made to a debtor from inter vivos trust within 180 days of filing are not interests by what of bequest, devise, or inheritance and that such words do not encompass a revocable living trust. In my opinion living trusts are essentially will and probate substitutes, and without spendthrift protection, their beneficiary interests vested in the debtor within 180 days should be included in the debtor?s bankruptcy. Case No.10-30571 Northern District of Florida, August 6, 2010..

Full post as published by Florida Bankruptcy Law on September 27, 2010 (boomark / email).