They’re not “I love you” or even “I am sorry”.
They’re bequest, devise, and inheritance from §541(a)(5)(A).
Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
This subsection is one of three exceptions to the idea that the bankruptcy estate consists of the property interests the debtor has at filing.
The reason I mention this provision is that I’m watching lots of lawyers conflate those words “bequest, devise, or inheritance” into “acquire by reason of someone’s death”.
Don’t fall into that trap. Those three little words have precise meanings, found in state law. Surowitz, 94 BR 438; Roth 289 BR 161. Roth held that devise and bequest involved transfer by way of will.
Most commonly, it becomes important to parse this language when our debtor is the beneficiary of someone who died within the 180 days after the commencement of the bankruptcy case, with a living trust as their testamentary instrument.
To keep your client’s share of that estate out of the bankruptcy estate, you need to know whether state law would bring acquisition by trust within either of those three, critical words.
In Zimmermann, 306 BR 328, my clients and I are delighted to report that neither bequest, devise or inheritance describes the method by which a California beneficiary participates in a revocable trust, become irrevocable by reason of a post petition death.
This distinction is not relevant if the debtor has an interest in the estate of someone who has died prior to the bankruptcy filing. If the rights in the estate have become fixed before filing, you may be stuck dealing with the value of the inheritance and perhaps sharing it with creditors.
Unless, of course, the debtor’s interest is held in a spendthrift trust, enforceable under state law.
As an issue of planning, the corollary from this discussion is clear: if the debtor stands to inherit (in the broad sense of the word) from someone whose health is precarious, inquire about the nature of the testamentary instrument involved. Consider whether it is possible to have the putative donor revise the will in question to put any gift to your client outside of the reach of bequest, devise or inheritance.
Image courtesy of Clover_1.
Cathy, have you seen a case were a debtor was listed as the life insurance beneficiary on a policy owned by the debtor’s ex-spouse? I’m reviewing a case where the debtor received the inheritance within 180 days after the bankruptcy was filed from her ex-husband. Her former spouse forgot to change the beneficiary.
Sam Turco
http://www.SamTurcoLawOffices.com
I don’t think it matters who owned the policy at filing, only that the debtor got an influx of money post petition.
Check the marital settlement agreement. Is there an argument that it really should have gone to someone else by reason of the divorce?
Is there an exemption available for the proceeds assuming it comes to your client?
Cathy,
I found some really interesting cases on what constitutes “inheritance” for purposes of 541(a)(5)(A). The Iowa bankruptcy court ruled (In Re Kilstro, 2011 Bankr. Lexis 955) a “payable on death” transfer did not constitute “inheritance” for purposes of 541(a)(5)(A). “I conclude that the monies received by Kilstrom from the pay on death
account established by his mother and which were paid as a result of her
death within six months after the filing of his bankruptcy petition are
not included as property of his bankruptcy estate by 11 U.S.C. § 541(a)(5). Cases from two other jurisdictions support this conclusion. See Holter v. Resop (In re Holter), 401 B.R. 372 (Bankr. W.D. Wis. 2009); In re Hall, 394 B.R. 582 (Bankr. D. Kan. 2008), aff’d, 441 B.R. 680 (B.A.P. 10th Cir. 2009).”
Thanks for writing this article!
Pay on death and rights of survivorship do not fall under that subsection. Be very careful of this subsection and section 348 when you convert.
this analysis applies to most Living Trusts as well. (at least in CA)
When I interned with Judith Copeland who was an estate planner in San Diego, she said that bequest and devise mean the same thing which is that the giver gave you something in a Will. But when she wrote up trusts she always used the word “give”. I hereby “give” you 10% of the residue of the estate or I give you my car and my shot guns. I think that’s a great practice point for us to teach our estate planning friends. Of course an inheritance is what you get if the decedent dies without a Will or a Trust to direct what to do with assets. But don’t forget subsection (C) of 541: They punk the bankrupt debtor if his “gift” is a death benefit under a life insurance policy as well.