By Kitty J. Lin
All assets you own at the time you file for bankruptcy are considered to be property of the bankruptcy estate with certain exceptions such as qualified retirement plans. Normally if you acquire property after the bankruptcy case is filed it is not considered to be property of your bankruptcy estate. One exception is if you receive a bequest, devise, or inheritance within 180 days of your bankruptcy filing date. If you are entitled to a bequest, devise, or inheritance within this time frame the asset becomes property of the bankruptcy estate even though you did not receive this asset until after your bankruptcy case was filed. Applicable state law determines whether an asset is considered to be part of the bankruptcy estate. Butner v. United States, 440 U.S. 48, 50 (1979).
In accordance with California law, a bequest is defined as “a gift (transfer) by will of personal property; a devise as a testamentary disposition of land or realty or a gift of real property by the last will and testament of the donor; and, inheritance as property which descends to an heir on the intestate death of another.” Birdsell v. Coumbe (In re Coumbe), 304 B.R. 378, 383-385 (9th Cir. BAP 2003).
So what happens if someone leaves you an interest in property through a trust after you have filed for bankruptcy? The answer depends on the type of trust you are receiving distributions from. There are two main types of trusts: inter vivos trust and testamentary trust. You should let your bankruptcy lawyer know if you are the beneficiary of a will or trust prior to your bankruptcy case being filed so they can advise you. Hopefully your loved ones received good Bay Area estate planning advice and have created a trust to pass on their assets. An inter vivos trust is a trust that is created during the lifetime of the person that originally funded the trust. In California if you receive distributions from an inter vivos trust you do not have to worry about turning over any distributions from this trust to your creditors. Any distribution of assets through an inter vivos trust are not part of your bankruptcy estate.
A testamentary trust is a trust that is created from the terms of a will of the person that has recently passed away. The distribution of any assets from a testamentary trust is considered to be part of the bankruptcy estate. That means if you are unable to protect this asset with your available exemptions the asset can be subject to liquidation in a Chapter 7 bankruptcy case and your interest in the asset will be given to your creditors (only up to the amount you owe creditors).
What about if the subject asset is to be transferred to a trust in someone’s will? Is the trust considered to be a testamentary trust or an inter vivos trust? The answer depends on whether the trust is already in existence. If the property is to be distributed to an inter vivos trust that is already in existence the asset is considered to be part of an inter vivos trust and not included in your bankruptcy estate. If the will creates the trust upon the death of the person funding the trust then the trust is considered to be a testamentary trust and any assets received from the trust will be part of your bankruptcy estate. Confused? Please consult with a bankruptcy attorney or estate planning lawyer so they can help you differentiate the two types of trusts.
At The Law Offices of Lin and Wood we provide comprehensive inter vivos revocable living trust services as well as bankruptcy services. Bankruptcy law crosses over into every other area of law and it is important to retain the services of an attorney that knows how to best protect you and your family.
