Originally posted on the Bryan Cave Bankruptcy & Restructuring Blog, found here.
A recent decision out of a New Jersey Bankruptcy Court highlights a loophole in the Bankruptcy Code which may allow Chapter 7 debtors to keep significant assets out of the hands of trustees and creditors.
In In re Norris, the Bankruptcy Court considered whether an inherited individual retirement account is property of the bankruptcy estate. Prior to the Debtor filing her bankruptcy case, her stepmother passed away, leaving an inherited IRA naming the Debtor as the beneficiary. In her amended schedules, the Debtor listed the inherited IRA, claiming it as fully exempt under 11 U.S.C. § 522(d)(12), but also claiming the inherited IRA was not property of the estate. The Chapter 7 Trustee objected to the exemption and requested the inherited IRA be deemed property of the bankruptcy estate. (more…)
In 2012, the Fifth Circuit ruled in In re Chilton that inherited IRAs constituted retirement funds within the “plain meaning” of §522 of the Bankruptcy Code and were thus exempt from the bankruptcy estate, under § 522(d)(12) (the federal exemptions). See our prior discussion of this case here. (more…)
There is some uncertainty as to whether and under what circumstances a revocable trust created by a decedent prior to death would be subject to the claims of the decedent’s creditors after the decedent settlor’s death. Now the Sixth District Court of Appeals of Ohio has weighed in on this issue in Watterson v. Burnard, 986 N.E. 2d 604 (Ct. App. Ohio, February 1, 2013).
In this case, Brad Watterson was injured in an auto accident caused by Barthel Burnard. Brad then filed suit against Barthel, but while the personal injury case was pending, Barthel died. Prior to her death and actually prior to the accident, Barthel had created and funded a revocable trust. After Barthel’s death, Brad sought declaratory and injunctive relief that Barthel’s trust would be available to satisfy any judgment he might obtain in his personal injury case. Barthel’s Trustee argued that Brad’s right to access Barthel’s revocable trust to collect on a judgment ceased when Barthel died. The trial court agreed, stating that as a matter of law the assets in a revocable trust would cease to be available to a creditor unless the creditor’s claim was reduced to a judgment prior to the settlor’s death. (more…)