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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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