Law Tips – Bankruptcy

This week’s Bankruptcy Law topic features a CLE presentation during ICLEF’s 2011 Annual Bankruptcy Institute by Sally J. O’Connor of the Law Office of Mark Zuckerberg, Indianapolis. Sally’s presentation entitled, “Emerging Issues, Quirky Tips and Bankruptcy Tidbits offered timely updates for any lawyer with bankruptcy-related matters.  She alerts her colleagues to the shifting landscape in bankruptcy practice, including trusts, same-sex marriages, Chapter 13, FMV Credit, Liens, IRAs and other areas. Overall, she summarizes the significant impact from recent cases as follows:

•  Balance between the rights of debtor and trustee have shifted in trustee’s favor;

•  Opportunity for malpractice by debtor’s counsel has increased;

•  Debtors’ assets remain at risk as long as they remain in bankruptcy estate;

•  Assets will remain in estate until trustee formally abandons them or until they are abandoned by operation of law when case is closed;

•  Claiming exemption labeled as “100%”, “unknown” or “to be determined” is not a fail safe way to protect an asset

Here are two excerpts relating to trust issues that give some insight into the recent developments:

Funeral Trusts in Indiana

The pre-payment of funeral expenses by virtue of an irrevocable funeral trust is becoming more common as individuals attempt to simplify the burial process and avoid placing a financial burden on their family members. Funeral trusts in Indiana are specifically governed by Ind. Code § 30-2-9- 1.5 et seq. and  § 30-2- 10- 1 et seq. See also Ind. Code 30-2- 13 et seq. The entire value of an irrevocable trust or an escrow established under Ind. Code § 30-2-13-12.1 may not be considered as a resource in determining a person’s eligibility for Medicaid under Ind. Code § 12- 1 5-2- 1 7. Consequently, a client contemplating relocation to a nursing home or retirement facility may consider pre-paying his funeral expenses. Indiana Code § 30-2-10-3 sets forth that such a trust must be irrevocable; have only one settler; names as trustee an Indiana institution qualified under section 2 of this chapter and requires that all funds be deposited in that institution; names a funeral home, licensed under Ind. Code § 25-15, as sole beneficiary; and is accompanied by a written contract between settler and beneficiary as provided in section 5 of this chapter. Indiana Code § 30-2-10-5 requires the contract to be in writing and contain, at a minimum, twelve delineated requirements which must be met in order for the contract to be valid.

An attorney faced with a client who has a funeral trust fund must take care to verify the validity of the irrevocable trust. If all requirements are not met under Ind. Code § 30-2-10 et seq., the bankruptcy trustee may be able to seize the assets of the funeral trust and liquidate said assets for distribution to the debtor’s creditors.

Exemptions in Property Held in Revocable Trusts

Whether or not a debtor can claim the homestead exemption for real estate held in a revocable trust for the benefit of the debtor is still in question in Indiana. However, a few Courts have found in favor of allowing the exemption.

In re Kester, the Tenth Circuit Court of Appeals held that a beneficial interest in a self settled revocable trust to which the debtors had transferred their residence was a sufficient equitable interest to qualify for a homestead exemption under state law.
–In re Kester, 493 F.3d.1208,2007 WL 19821 54 (1 oth Cir. July 10,2007). See also, In re Szwyd, 370 B.R. 882 (lSt Cir.BAP 2007), a favorable decision from the First Circuit.

The Bankruptcy Court for the Middle District of Florida is also in favor of allowing the exemption if certain conditions are met: 1) the debtor has the intent to make the real property his or her homestead; 2) the debtor actually maintains the property as his or her principal residence; and 3) the debtor has a legal or equitable interest that gives the debtor the legal right to use and possess the property as a residence.
–In re Cocke, 371 B.R. 554, 556-557 (Bankr. M.D. Fla.2007). In re Cocke, the debtors were the grantors of the trust, had the right to revoke the trust at any time, and the trust granted them the same rights as anyone holding fee simple title. The Court found that the debtors had met the conditions and were entitled to claim the homestead exemption.

A different result was reached, however, by the Bankruptcy Court for the Middle District of Florida in a case where title to the real property at issue was held by a limited partnership. In that case, the limited partner was a trust, the limited partner held 100% of the stock of the general partner, and the debtor was the sole beneficiary of the trust.
–In re Steffen, 391 B.R. 874, (Bankr.M.D. Fla. 2008), affirmed. In re Steffen, 405 B.R. 486 (M.D. Fla. 2009).

Similarly, an Arizona Court ruled that the debtors could not claim the Arizona homestead exemption in property where debtors had transferred title of the property to a limited partnership, even though the debtors held 100 percent in the partnership.
— In re Lyle, 355 B.R. 161 (Bankr. D.Ariz. 2006).

To take advantage of the comprehensive list of bankruptcy issues covered during the 2011 Annual Bankruptcy Institute Click Here to view the Online / On Demand Video or to sign up for a Video Replay near where you work or live.

Thanks again to Sally O’Connor, contributing authors Amy Baker and Amanda Quick, and all our faculty who continue to provide cutting edge education for lawyers.


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ICLEF • Indiana Continuing Legal Education Forum, Indianapolis, IN

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