Just to update prior posts, the Florida Legislature has provided in Section 222.21(c)(3)(2011) that inherited IRAs are protected from creditors. But as a further observation on exemptions, it is still necessary to be sure that the debtor has resided in Florida for at least 2 years. Otherwise, Florida exemption statutes will not protect the debtor in bankruptcies.
Archive for the ‘Bankruptcy: Probate and Estate Planning’ Category
Inherited IRAs, Continued
Saturday, December 10th, 2011Self-Settled Trust
Sunday, November 20th, 2011In Re Quaid, 2011 US Dist Lexis 132299, (D. Ct. M.D. FL Nov 15, 2011) the United States District court reversed the decision of the bankruptcy court, Judge Briskman. Debto’s spouse had set up a trust. Funds were later transferred from a tenants by the entireties account to the trust. Non-debtor spouse died. The district court held that the trust was not a self-settled trust and the spendthrift clause shielded the asset from the bankruptcy trustee. The deceased spouse had the right to withdraw funds and revoke the trust, so the debtor was not the settlor, so the spendthrift clause controlled.
So what really happened here? We know that husband and wife can own property as tenancy by the entireties. This means that a creditor of one spouse cannot reach or split the asset held as tenants by the entireties. But the tenancy ends upon death or divorce. So if one spouse passes away, the surviving spouse becomes the 100% owner of the asset which is now subject to that person’s creditors.
In Quaid, Mr. and Mrs. Quaid transferred over $300,000 from a tenancy by the entireties bank account into a trust. Only one party had control of the trust, causing a loss of tenancy by the entireties protection, the court observed. Tommie, the wife, had set up the trust originally and was the only person who could withdraw or revoke funds. Upon her death, the debtor and his son became co-trustees. A $3,000,000 judgment was entered against the surviving spouse, Mr. Quaid. If he had been the sole owner of the funds, the assets would have been subject to his creditors. Since the funds were not in a self-settled trust, the district court held that the bankruptcy trustee could not reach these funds. The court reviewed Florida law and discussed the characteristics to determine whether or not a trust is self-settled.
Note there was no discussion of a fraudulent transfer issue, but under Florida law cannot fraudulently transfer property held as tenants by the entireties.
Inheritances after Filing: Exemption and Chapter 13 Issues
Sunday, August 21st, 2011South Florida bankruptcy attorneys know that if a debtor inherits property within 180 days after filing of the bankruptcy, that the property becomes property of the estate subject to administration by a chapter 7 trustee. More specifically, this means that if a person dies within 180 days after the bankruptcy is filed, and the debtor has the right to receive an inheritance including life insurance proceeds, that the property belongs to the bankruptcy estate even if the asset has not yet been received by the debtor.
A couple of recent cases raised issues of great concern for debtors and had favorable rulings. In re Cutiignola, 450 BR 445, (Bankr. S.D. N.Y. 2011) upheld the debtors’ claim that that they could assert their bankruptcy exemptions to protect inherited property even though they had no interest in the property at the time of filing the bankruptcy petition. The debtors could claim as exempt property including homestead and an IRA that became property of the estate as a result of inheritance. The court relied in part on a decision binding in the Southern District of Florida, In re Wilson, 694 F. 2d 236 (11th Cir. 1982)(refund of attorney’s fees to the debtor could be claimed as exempt).
What if a person dies more than 180 days after the bankruptcy is filed, does the property belong to the bankrutptcy estate? In a chapter 7, clearly no. And one would think that the same rule applies in a chapter 13. But an 11th Circuit case raises a serious concern for a debtor who inherits property during the term of the plan, which can be up to five years. In re Waldron, 536 F. 3d 1239, (11th Cir 2008). In Waldron, the court concluded that a post-petition uninsured motorist claim was property of the estate.
This inheritance issue was addressed in In re Walsh, 2011 Bankr Lexis 2602(Bankr. S. D. Ga. June 15, 2011) The court stressed that unlike an accident claim, there was a specific time period of 180 days for inheritances for property of the estate in Section 541. Walsh noted there were conflicting earlier opinions in the Middle District of Florida. Walsh upheld the debtor’s position against a claim by the chapter 13 trustee that the inheritance should be added to the bankruptcy estate.
Fort Lauderdale bankruptcy attorneys should remain concerned about the issue of inherited property in a chapter 13.
Bankruptcy and Reverse Mortgages
Friday, May 6th, 2011Reverse mortgages can at times be extremely beneficial to senior citizens to be able to obtain use of the equity in their homestead. The homeowner can eliminate the requirement to pay on a mortgage and may be able to receive an income stream from the lender.(This is not actually income but is a steady receipt of loan proceeds)(Also note that for practitioners in other states care must be given to the amount of homestead protection, which is unlimited in Florida.)
But timing is everything. A potential client saw me for a consultation last week. The client already obtained a reverse mortgage and took a lump sum of cash from the reverse mortgage. Meanwhile, the client had existing credit card debt which would easily justify a bankruptcy. Clearly, the bankruptcy should have come first, all debts would be discharged, and then the owner could safely get cash out.(Also, the client transferred the funds for the family to purchase property for her out of state to be the new residence.)
(Note that in the above case there is an argument that the funds taken out from the reverse mortgage, if still traceable, are the proceeds of the homestead and therefore exempt. But this was not a sale, and loan proceeds would likely be challenged as exempt by the trustee.)
In this case, as a Fort Lauderdale bankruptcy attorney in Broward County, Florida, it was certainly apparent that there would be great problems if a bankruptcy were to be filed.
Inherited IRA, New Case Allows Exemption
Tuesday, April 19th, 2011In a prior post I discussed cases where a who inherited IRA was found not to be exempt from creditors when the IRA was not inherited by a spouse. A recent decision found the inherited IRA to be exempt in a Florida bankruptcy. In re Mathusa, 2011 Bankr Lexis 965(Bankr. M.D. FL. March 28, 2011). The court adopted and expanded upon the reasoning of an appellate court decision in In re Nessa, 426 BR 312(8th Cir. BAP 2010).
This court distinguished prior Florida bankruptcy decisions that found that an inherited IRA was not exempt under Florida law pursuant to Florida Statute 222.21(2). However, though Florida is an opt-out state as to exemptions, a Florida resident can still utilize a section added by BAPCPA. Section 522(b)(3)(C) applies to opt-out states and can be used to protect inherited IRAs.
Mathusa will hopefully resolve this issue which will allow estate planning attorneys, bankruptcy attorneys and their clients to sleep easier.
Elective Share and Bankruptcy
Saturday, February 12th, 2011The bankruptcy code provides that if a debtor acquires or becomes entitled to inherit property within 180 days after filing a bankruptcy, the right to that inheritance belongs to the bankruptcy trustee. So if a person dies during that time, and the debtor is the beneficiary of the will or life insurance, the debtor is obligated to turnover these funds.
In a recent case, Judge Paul Hyman in the Southern District of Florida addressed the issue of an elective share. In Re Miller, Case NO 09-19821, adv No 10-3152. The debtor’s husband died on March 6, 2009. Debtor filed bankruptcy on May 14, 2009. The husband had an IRA in which the children were the beneficiaries. So the debtor apparently had no right to these funds. But actually, the debtor had a right to claim an elective share of 30% of her husband’s assets. The debtor did not assert the election until 350 days after the petition was filed. The trustee, Michael Bakst, claimed that the funds had to be turned over. trustee.
Judge Hyman held that the elective share is a personal right of the debtor and was not property of the estate. The personal right was not a property right. (Consider the likelihood of a different result if the debtor had been a beneficiary of a will and filed a disclaimer in the probate case).
As a Fort Lauderdale bankruptcy attorney, probate issues at times must be considered to properly represent my client.
Bankrutpcy and Estate Planning: Remainder Interests Exempt?
Saturday, October 9th, 2010A common technique to avoid probate on homestead real property is to prepare a deed reserving a life estate for the homeowner with a remainder interest in the children or other relatives. But what if the child who has a remainder interest files bankruptcy? Can the trustee force a sale in bankruptcy of a remainder interest in real estate?
The remainder interest does not create a current possessory right. There has been authority that this remainder interest is not protected by the homestead exemption. Judge Killian had held that this was the case based on a Florida Supreme Court Case. See In re Lewis, 226 BR 703 (Bankr. N. D. FL 1998).
But what if the child, the remainderman, has lived in the property for years? In this context, two recent cases found that the homestead protection applies to remainder interests depending on the facts of the case. Judge Williamson in the case In re Williams, 427 BR 541 (Bankr. M.D. FL 2010). More recently, Judge Killian receded from his prior decision and also found in favor of the debtor under similar circumstances as the Williams case. See In re Hildebrandt, 2010 WL 2718044 (Bankr. N.D. FL 2010).
Fort Lauderdale bankruptcy attorneys must keep in mind that the above decisions are not binding precedent on other bankruptcy judges.
Watch out for Inherited IRAs
Sunday, October 3rd, 2010Florida bankruptcy attorneys know that there is an exemption in Florida for IRAs that protects the assets from creditors. As a Fort Lauderdale bankruptcy attorney, I recognize the critical importance of protecting exempt assets. But recent case law must give practioners cause to be careful. Though an IRA is exempt, and apparently so is the spouse’s interest upon the death of the IRA owner, what about the IRA that is inherited by another relative? A recent bankruptcy decision held that the inherited IRA is not exempt. In re Szmansky, 2010 WL 3400368,(Bankr. MD FL Aug. 19, 2010) relied on a recent Florida state court decision interepreting Florida Statute 222.21(2), Robertson v Deeb, 16 So.3d 936( Fla. 2d DCA 2009).
Florida bankruptcy attorneys must be alert to the issue of inherited IRAs.