Bankruptcy, Property and Grandma’s China

I spend a lot of time talking to my clients about property of their Bankruptcy estate — what it is, what it isn’t and what that all means; and that talk has changed over the years.  When I was a much younger lawyer, I didn’t always mention that if someone dies within 180 days after a bankruptcy is filed and leaves the debtor an inheritance, that inheritance will be property of the Bankruptcy estate. 

Now, the general rule is that a bankruptcy estate is formed at the instant that a Bankruptcy is filed.  It includes all property including contingent property, unrealized property and even unknown property that the Debtor had any interest in at the time of the Bankruptcy filing.  (Of course, it only includes the Debtor’s actual interest — whatever that may be.)  There is one exception to that found in Section 541 of the U.S. Bankruptcy Code.  That exception is for property received by bequest or inheritance within 180 days after the Bankruptcy is filed. 

Of course, with almost all things Bankruptcy related, this is both simple — and not so simple.  The statute actually provides for all property that the debtor “acquires or becomes entitled to acquire” by bequest, devise or inheritance.  So, having Uncle Jake hold your money for six months doesn’t cure the problem.  The right to receive the inheritance occurs the instant the Decedent died, not when funds are actually disbursed.  Complicating this, of course, is that the instant someone dies, it generally isn’t known what kind of an estate there will be, how many claims will be filed in the probate, how much property will be sold for, there are countless questions.  Regardless, each beneficiary’s interest in whatever that person will ultimately receive becomes fixed at the moment of death — even if it isn’t known yet. 

About this point in time many of my clients start freaking out.  Here is why most of them have little, if anything to worry about.  First of all, 180 days is really not a very large window.  Second, the statute says “bequest, devise or inheritance”.  Depending on State law that may or may not include Grandma’s estate plan.  Third, we come to the biggest savior of most bankruptcy debtor’s stuff.  Bankruptcy trustees are not in the garage sale business — at least, not in Oklahoma.  Sure, if Grandma leaves you a paid for house, a collection of pristine 18th Century French antiques and an antique Wedgewood table service — your Trustee will be showing up.  If the house has barely enough equity to pay the taxes, insurance and closing costs, the furniture is 1970’s era Mathis Brothers, and the china is well-used Lenox — your Trustee may find other things to do.  Oh, and the everyday dishes, pictures, knick knacks, oil painting in the living room from an unknown artist — nobody wants that stuff but family. 

In twenty-two years of practicing law I have had two clients with family members who died unexpectedly after their bankruptcy was filed.  In both cases, the clients were hysterical and convinced something horrible was going to happen.  In neither case, did their Bankruptcy trustee wind up with anything.  I also postponed a bankruptcy filing for more than a year, which took a substantial amount of finagling to manage.  The postponement was because the Debtor’s Mother had just died, and the Debtor needed to get the Estate liquidated before she filed.  There was a house, a business, antiques, you name it.  Well, let’s see; the house was fully mortgaged, the business was losing money hand over fist and the antiques — well, no dealer could be found who was sufficiently interested to drive out to small town Oklahoma to pick them up.  Oh, well.

Of course, to me, the really interesting questions are what constitutes a bequest, devise or inheritance.  Sure, if you are a beneficiary under a traditional will, that is pretty clear; but frankly, there aren’t a lot of those around anymore — at least not that are distributing serious assets.  So, what about a revocable trust, a testamentary trust, a transfer on death deed, life insurance proceeds payable directly to a beneficiary, ERISA qualified retirement accounts transferring to a designated beneficiary, joint tenancy property?  This is how most stuff moves around upon death these days.  Is any of this by “bequest, devise or inheritance”?  In Oklahoma?  Beats the heck out of me, but it won’t be easy or automatic for the Trustee; and it is going to have to be enough to be worth it.

Elaine

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