(Reprinted with expressed permission from BankruptcyMastery.com)
By Cathy Moran, Moran Law Group, Mountain View, CA
Bankruptcy’s 3 little words – unfortunately, they’re not “I love you” or even “I am sorry” but 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.
Cathy Moran has headed her own small firm Moran Law Group in Mountain View, California, for nearly 30 years. Family law and tax issues as they play out in bankruptcy are areas of particular interest to Cathy.