Legal Gurus: Legal use of Spendthrift clause in pre - BK 7 plan for poss. medical BK.

[slvnomore]

Legal Gurus: Legal use of Spendthrift clause in pre-BK 7 plan for medical BK.

Sometimes in your life you go through a a rough time. This is an entire rough season.

Besides myself, I have no less that 3 brothers, sisters, and loved ones going through very serious medical crises heart surgery, MS, breast cancer etc. - they are not well off and since 60% of all BK are medical even for those who have insurance. There is a very good chance that they may be forced to file bk 7 in the future because of medical. In other words I may be the first
in my family forced to file medically related bk 7, but not the last.

I talked with my parent who is elderly, about a smart legal pre- bk7 estate planning
tool called a spendthrift clause and updating the will with this clause to protect passing on the family farm to all my siblings in accordance to their wishes in the event any of us have to file medical bk 7.

INTENDED RESULT: To protect my whole family including myself.

How do we add this to their estate will so that it is rock solid and protect all
my siblings and myself in case of medical bk 7 even if we live in different states?

QUESTIONS:

1) Does this spendthrift clause actually protect if in place before any of us file bk7 ? Are there any Gotchas?

2) Can one clause be used for all siblings or does it have to be written separately for each?

3) If we are in different states from my parent, what do you do so the clause is legal in both theirs and ours?

4) My parent is willing to look into with his lawyer but what exactly is it that we need to ask them to tell their lawyer to insert and when does it need to be done?

5) Anything else we should know?

Thank you so much for your valuable time, wisdom, advice, and hope.


P.S. I have done my best homework FIRST to show respect for your valuable time.
I have included some examples of supporting research below to help illustrate my questions


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SPENDTHRIFT CLAUSE RESEARCH:

60% of all Bankruptcies are medically related. And that is those that have insurance!
After a long battle, which I took all the way to the att. gen office, I may have to declare Bankruptcy in the near future. But I may not be the only one. Who knows what lies ahead medically for our brothers, sisters, loved ones, etc. who are going though severe medical crises even with insurance? This is one way to protect everyone. however, For it to protect, it has to be in place legally before anyone files BK 7 as i understand it.


Q 1 ) What happens if I inherit something after filing for a Chapter 7 bankruptcy?

1. If a debtor inherits money or property within 180 days (or 6 months) after filing, these assets automatically become part of the debtor's estate and can be seized, liquidated and distributed to creditors. Which defeats the whole purpose of filing bankruptcy.
it if is within 180 days of you filing a Chapter 7 bankruptcy, any inheritance or life insurance that you receive will come under the control of the Chapter 7 trustee and will be used to pay your creditors. you should discuss the situation with your attorney.

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3. In a Chapter 7 case, an inheritance received within 180 days after you file for bankruptcy becomes part of your bankruptcy estate, the trustee can take it to distribute to your creditors.

4. An inheritance the debtor acquired before the bankruptcy case was filed or within 180 days after the bankruptcy case starts is considered part of the bankruptcy estate, according to 11 U.S.C. §541(a)(5)(A). If the inheritance is determined to be part of the bankruptcy estate, the trustee may demand all or any portion of the inheritance that is not subject to an exemption.

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Q: 2) HOW CAN I LEGALLY PROTECT A POSSIBLE INHERITANCE IN SMART PRE - BANKRUPTCY PLANNING?

1. A careful estate planning attorney may anticipate a bankruptcy with the creation of a spendthrift trust, rather than a complete disinheritance. The will could even provide that in the event the beneficiary has filed a bankruptcy petition within six months (180 Days), the outright distribution shall not be made, but instead shall pass to a trustee of a spendrift trust, perhaps for distribution outside the 180 days.
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2. Spendthrift Trust
When a debtor cannot claim the inheritance as exempt, receiving the inheritance through a spendthrift trust is another way to protect her assets. If a beneficial interest is transferred to the debtor through a trust, that interest is not considered part of the bankruptcy estate, according to 11 U.S.C. §541(c)(2). Since the asset received through the trust is not part of the bankruptcy estate, the bankruptcy trustee cannot demand that the debtor use the interest in the trust to pay creditors. The spendthrift trust must be valid and enforceable under state law in order for section 541(c)(2) to be applicable.
3. Bankruptcy attorneys sometimes advise debtors to request family members to change their Wills to avoid any outright distributions to them during the 180 days. This can be an embarrassing and delicate task. A spendthrift trust is one way.

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ONE SAMPLE OF WORDING IN SPENDTHRIFT TRUSTS TO PROTECT AGAINST BANKRUPTCY:
"Regardless of anything herein to the contrary, in the event that any beneficiary of an outright distribution or from a trust shall have filed a petition for bankruptcy during the period beginning 181 days prior to my passing, and extending to the day after my passing, then such beneficiary shall not be entitled to any distribution.
"In such event, the distribution shall instead be held by my trustee for the benefit of such beneficiary, and the income and principal therefrom shall be distributed to such beneficiary in the sole and absolute discretion of my trustee at a time no later than 180 days following my passing or if such beneficiary survives me.

[justbroke]

Everything you posted reads as a hypothetical without any specific citations or caselaw supporting any of the theory for YOUR specific State and trust. Having wrote that, Estate Planning is a very specific area of law and you should only consult with estate planning attorneys who specialize in this area of law, in your State.

Do not use just any attorney for this, you need an estate attorney and possibly a bankruptcy attorney, both working together to craft such a trust.

[slvnomore]

Great! thats the kind of specificity I want to know, Where can I go to Learn more? Do you have any links or books to recommend? Have you had experience with this yourself?

My parent is in Fla I am in IL, If that helps. ; ) Thanks!

[justbroke]

I had some potential issues with a Living Trust, but the Trust and Estate were created before my bankruptcy. How your Trust is treated is based on your State's laws. I can't be anymore specific. If you're trying to protect assets through an Estate or Trust, there is nothing more important than a competent estate attorney. Mine was also multi-State (and I'm in Florida).

The difference for mine was that I wasn't trying to protect things using spendthrift protection to remove property from the bankruptcy property of estate. My issues were really outside the bankruptcy.

[LadyInTheRed]

As JB said, your parents need to talk to an experienced estate planning attorney in their state. They should look specifically for an asset protection specialist.

I can tell you that in general it is very difficult, to keep the assets of a trust 100% safe from a beneficiary's creditors. Once money is in the hands of a beneficiary, it's fair game and it is often possible to compel a trustee to distribute assets from a trust even if the trust doesn't require distribution. I work in this area of law, and have read up on spendthrift clauses. But, it's been a long time so I don't remember many details. Because of the kinds of clients my firm represents, it's not an issue that comes up very often.

If any family members have permanent medical issues, your parents should also ask an estate planning attorney about special needs trusts.

4) My parent is willing to look into with his lawyer but what exactly is it that we need to ask them to tell their lawyer to insert and when does it need to be done?

That's the easy part of your question to answer. Your parent should ask his lawyer what can be done to leave his estate to his children while keeping it out of the hands of his children's creditors in the event of collection actions or bankruptcy.

[btbeme]

To reinforce: I know of a current Ch 7 that has been discharged but kept open as an assets case for nearly three years. At issue is a 25% share of a parent's Life Estate. Now, that Life Estate is not an asset that the petitioner can actually access until such time that the parent dies; however, the Trustee feels that the future value of that asset is marketable and is being allowed to take offers.

That begs the question of what type of person would "invest" in a share of a Life Estate, hoping that the value of that share would be worthwhile once the parent dies. Kinda sick in a way, but it goes to show that a trust, estate, etc can still be considered to be of some value.

[LadyInTheRed]

That begs the question of what type of person would "invest" in a share of a Life Estate, hoping that the value of that share would be worthwhile once the parent dies. Kinda sick in a way, but it goes to show that a trust, estate, etc can still be considered to be of some value.

There is a whole life insurance market where you can sell an existing policy on your life (or a policy you own on somebody else's life) to a stranger, or where the stranger can pay you to allow them to buy life insurance on your life. Can you imagine a total stranger waiting to profit off your death? Pretty scary!

Good point about keeping a case open because of the debtor's existing right to receive an asset at a later date. In most cases, when somebody dies, their assets belong to the beneficiaries on the date of death, even if they don't receive the assets for years. That future right to receive assets is an asset that can be sold.

[slvnomore]

I want to thank you for all your replys, I appreciate the candor and good advice.

Here is what I am gleaning so far: PLEASE FEEL TO CORRECT OR ADD TO FOR VERACITY.

1) AGREED: Your parent should ask his lawyer what can be done to leave his estate to his children while keeping it out of the hands of his children's creditors in the event of collection actions or bankruptcy.

2) UNDERSTOOD: How your Trust is treated is based on your State's laws. I can't be anymore specific.

3)AGREED: If you're trying to protect assets through an Estate or Trust, there is nothing more important than a competent estate attorney. Mine was also multi-State (and I'm in Florida).

4) As JB said, your parents need to talk to an experienced estate planning attorney in their state. They should look specifically for an asset protection specialist

5) I know of a current Ch 7 that has been discharged but kept open as an assets case for nearly three years. At issue is a 25% share of a parent's Life Estate. Now, that Life Estate is not an asset that the petitioner can actually access until such time that the parent dies; however, the Trustee feels that the future value of that asset is marketable and is being allowed to take offers. WOW. THATS SCARY> I THOUGHT THIS WAS THE WHOLE PURPOSE of THE SPENDTHIFT TRUST? HOW DO YOU PROTECT AGAINST THIS?

[justbroke]

What we are all saying, and in violent agreement, is that any sort of Trust/Estate in the Bankruptcy context, is subject to litigation! Please remember that the Chapter 7 Panel Trustees are practicing attorneys, and may of them deal with... yup... estates. They will try to pierce the Estate either finding a hole in the Estate which would not protect it or give it true spendthrift status.

As you have read from one post, from btheme, Trustees can get crafty and literally "wait" for someone to die. Morbid, but serious. Some of these Trusts have significant assets and could be used to pay the debtor's bankruptcy estate debt and then some.

There is no sense in speculating and trying to figure this out. Only a competent estate attorney practicing in your State is going to tell you what can be done. It may not even be possible to protect any Trust from a bankruptcy in your State.

You have read (heard) everything correctly. The key is going to be in the language of said Trust/Estate and what the laws in your State provide as protection. It will also depend on how "juicy" this asset is as well as how "hungry" the Trustee is at the time. There's no way to tell from where I'm sitting.

[slvnomore]

Thanks for the great advice, What I am hearing is that an estate att specializing in asset protection is the only one who can tell
you if this will work . Also I hear that A bk trustee may try to pierce a spendthrift trust if it is not legally air tight as a spendthrift trust.

So BESIDES a spendthrift trust, what other ways are there to legally protect a POSSIBLE inheritance in pre - bk 7 planning? Thanks!

[justbroke]

There are none. The bankruptcy code only protects certain "non-transferable" property as listed in 11 U.S.C. § 541(c)(1). Think about it? Congress purposely wrote (also in 11 USC 541) what is also considered property of the Estate, and that included inheritances, life insurance proceeds (death benefits) and property settlement as part of a dissolution of divorce. The law was meant to get to this money.

11 USC 541(c)(2) A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.

Read closely... nonbankruptcy law which is State law. There are just no other real exceptions! The question you should be asking is, what Estate planning attorney can help me in this area? You should not be asking if there are other ways to protect "Trust/Estate" assets in a bankruptcy. The law is very clear on this topic.

I don't know what else to say. If you read 11 USC 541(c)(1), you would see that the bankruptcy code specifically removes any language which restricts or attempts to restrict the transfer of property of the debtor! The only exception is that in (c)(2) which is the spend-thrift "exclusion". The Trustee will try to say it fails to meet nonbankruptcy law (State laws) and therefore is not protected because 11 USC 541(c)(1) removes any restrictions by operation of law.

Depending on the value of the property, a bankruptcy Trustee may not care about this particular asset... especially if you can exempt it.

[btbeme]

Depending on the value of the property, a bankruptcy Trustee may not care about this particular asset... especially if you can exempt it.

And I might add that the time, effort, and expense necessary to "grab" such an asset will also get calculated.

Grabbing cash or gold bullion in a safe deposit box is one thing. Grabbing a home with 5 co-owners, in a different state, is a different exercise. And grabbing something that requires maintenance to retain its value (such as a stable of semi-successful racehorses) is yet another.

Entanglements would get calculated. But the biggest overriding calculation would be the feasibility and value of the SALE of the asset - whether or not the asset itself had any real value at that very moment. By example... selling a racehorse does a number of favors to the seller - it generates a wad of cash, lowers the bill for hay and oats, and removes the expense of transporting the "asset" from track to track in order to remain valuable. The seller (the Trustee) wins, even if the horse never wins again.

And I am pretty sure the seller doesn't care if that horse ever wins again... they are too busy thumbing through their wad of cash.

[slvnomore]

Love the horse example! lol

This is a very interesting topic and I appreciate all the different view points, I am learning a lot.

Personally from my planet, Since the bk laws were shoved through with massive lobbying in 2005 and definatly in favor of the banks, not the consumer, coupled with the fact that the health care industry spends more on lobbying to keep costs astronomical, twice as much as even the oil industry, culminating in the fact that over 60% of all BK are medically related, with insurance, There is very little moral high ground for the banks IMHO. Its a rigged game. Just google Fraud plus your bank name!. All i am trying to find out is WITHIN the rigged game, what are the legal cards left to play.

Facing serious very medical problems for at least 3 siblings, with a real possibility of ch7 BK in the near future, My intent is legal strategy that would protect myself and my family in a smart legal way. Further, It would seem a possibility for millions of boomers with ch7 medical bankruptcy in the future and a staple for any smart estate planning.

I appreciate all opinions, and views. My intended result is to seek the best rock solid, triple checked, verified, clarified info on this matter, as I find often the person with the best information wins.

A few clarification Take aways:

1) There is nothing more important than a competent Multi-state estate attorney specialized in an asset protection.any spendthrift clause would have to be airtight in all states involved so that it cannot be pierced or thrown out by the trustee in the BK 7 state.

New Questions:

1) If you actually do have this legally COMPETENTLY in place before you file bk, then you don't have anything coming to you anyway during the entire procedure, so what would you legally declare?

2) Can this be put in place once, to protect all siblings?


Thanks for your patience and wisdom for a curious mind and here is the hope this deep dig benefits many ! ; )

[daveinIL]

Funny that you mention horses (livestock in general really). Out trustee showed less than zero interest in our horses. They were only valued at $25 each and the maintenance costs would be sure to scare anyone away.

[LadyInTheRed]

A few clarification Take aways:

1) There is nothing more important than a competent Multi-state estate attorney specialized in an asset protection.any spendthrift clause would have to be airtight in all states involved so that it cannot be pierced or thrown out by the trustee in the BK 7 state.

I very much doubt you will find any attorney who will tell you they can give you airtight protection in all states where the potential beneficiaries live. They probably won't even tell you they can give you airtight protection in the state where they practice. The law is constantly evolving and changing through court rulings and legislative changes. So, attorneys don't usually make guarantees. The fact is, that the law is rigged to make it very difficult, if not impossible, for somebody in bankruptcy or with judgments against them to inherit assets and keep them all out of the hands of their creditors, regardless of when the debtor is scheduled to actually receive the assets.

The only way your parents are going to get any meaningful answers to these questions is to talk to an estate planning attorney. You are not going to get good answers on the internet. Keep in mind that, unlike bankruptcy attorneys, estate planning attorneys don't tend to give free consultations.

Regardless of what they put in place, if they die within 6 months after one of their beneficiaries files BK, the beneficiary will have to report the fact that they became entitled to an inheritance (probably by amending their petition, but I'm not certain). You will only know if any creditor protection works if the trustee goes after the inheritance and the debtor fights it. Usually, it is cheaper to reach a settlement with the trustee than to fight.