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Bequest Through Parents' Living Trust Protected In Bankruptcy

By Jonathan Alper

The bankruptcy law provides that any money a debtor receives by ?bequest, devise, or inheritance? within the six months after a case is filed becomes part of the bankruptcy estate and is paid out to the creditors. I read about a bankruptcy cased decided late last year dealing with money a debtor received from a parent?s living trust after the parent died. The issues was whether a trust bequest is within the definition of a ?bequest, devise or inheritance? so that the trustee can claim the money.

The bankruptcy court thoroughly analyzed and discussed the technical meaning of the terms bequest, devise, and inheritance under Florida law. Summarizing ,the court found that the terms bequest and devise mean the same thing, and that is, a testamentary disposition of real or personal property under a will. The term ?I inheritance is not well defined under our laws, but the court found that its best meaning is the receipt of property form an ancestor under laws of intestacy.

A living trust is set up during the life of the parent (ancestor) and the parent, or trustmaker, gives the beneficiaries a contingent future interest while the trustmaker is alive. The court recognized that a typical living trust has a testamentary aspect and intent because it makes provisions for dispositions of property to children after the trustmaker?s death. However, the court said that the living trust?s testamentary aspects do not make the transfer a testamentary transfer.

This court concluded that money and property a bankruptcy debtor receives from a living trust within 180 days of filing is not captured by the bankruptcy trustee or the estate as a ?bequest, devise or an inheritance.?

The judge?s holding requires a strict reading of the applicable legal terms as indicated above. In my opinion, the statute intends the include in the bankruptcy estate all types of windfalls a debtor receives by virtue of the death of a family member within the 180 day period. I suspect that another bankruptcy court may reach a decision less favorable to the debtor.

In re Rogove Case No 09-24622

Full post as published by Florida Bankruptcy Law on February 09, 2011 (boomark / email).