Ability of Bankruptcy Trustee to Reach Post-petition Distributions
from Trusts
By Richard W. Nenno, Esq.
Wilmington Trust Company, Wilmington, DE
If a settlor's interest in a domestic asset-protection trust
(“APT”) is excluded from the bankruptcy estate under
§§541(c)(2) and 548(e) of the Bankruptcy Code (11 USC
§§541(c)(2), 548(e)), it may then be necessary to determine
whether any trust distributions to the settlor after the filing of the
bankruptcy petition will become part of the bankruptcy estate. This
issue will arise if the settlor receives a discretionary or mandatory
distribution of income or principal from the domestic APT.
The only potentially relevant Bankruptcy Code provision is
§541(a)(5) (11 USC §541(a)(5)), which provides in pertinent
part as follows:
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…
To be included in the bankruptcy estate under §541(a)(5)(A), a
domestic APT distribution must meet two requirements. First, the
debtor's receipt or entitlement to receipt must occur or arise within
180 days after the filing of the bankruptcy petition (receipts or
entitlements occurring more than 180 days post-petition will not
become part of the debtor's bankruptcy estate). Second, the receipt or
entitlement must result from a “bequest, devise, or
inheritance.”
Because the Bankruptcy Code does not define “bequest,”
“devise,” or “inheritance,” courts considering
§541(a)(5)(A) look to applicable state law (see Mattern,
2006 Bankr. Lexis 326 at 10-11 (Bankr. D. Kan. 2006); Eley, 331
B.R. 353, 358 (Bankr. S.D. Ohio 2005); Roth, 289 B.R. 161, 166
(Bankr. D. Kan. 2003); Schauer, 246 B.R. 384, 387-88 (Bankr.
D.N.D. 2000)) and, in the absence thereof, to Black's Law
Dictionary, which defines the terms as follows:
• A
“bequest” is “the act of giving property (usu[ally]
personal property) by will” (Black's Law Dictionary (8th
ed. 2004) at 168).
• A
“devise” is “the act of giving property by
will” (Id. at 483).
• An
“inheritance” is “property received from an ancestor
under the laws of intestacy” (Id. at 799).
It is hard to see how an interest in a domestic APT, which is an
inter vivos trust, fits into any of these categories, and courts
agree. For instance, in Newman, 903 F.2d 1150 (7th Cir. 1990);
accord Eley, 331 B.R. 353, 357-58 (Bankr. S.D. Ohio 2005),
income distributions received by the debtor from two irrevocable inter
vivos spendthrift trusts within 180 days after the filing of the
bankruptcy petition were not includible in his bankruptcy estate.
Principal interests are also protected. Thus, courts have held that
principal payable to a debtor from an inter vivos trust due to the
death of a parent within 180 days after the filing of a bankruptcy
petition did not come into the bankruptcy estate (Mattern, 2006
Bankr. Lexis 326 at 9-14; Spencer, 306 B.R. 328, 333-36 (Bankr.
C.D. 2004); Roth, 289 B.R. at 169).
This commentary also will appear in the July 9, 2009 issue of
the Tax Management Estates, Gifts and Trusts Journal. For more
information, in the Tax Management Portfolios, see Rosen and
Rothschild, 810 T.M., Asset Protection Planning.
*This document is not designed or intended to provide financial, tax, legal, accounting, or other professional advice because such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought. This document is for informational purposes only; it is not intended as a recommendation, offer, or solicitation with respect to the purchase or sale of any security. ©2009 Wilmington Trust Corporation. All rights reserved.
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