Written by attorney Michael Raymond Daymude

Bankruptcy and Your Inheritance

How an inheritance will affect your bankruptcy depends on: 1) timing; 2) your Chapter filing; and 3) the amount and nature of the inheritance.

In Chapter 7 liquidation cases there is a 180 day rule. If you are to receive an inheritance from a decedent who died within 180 days prior to the date of filing, or from someone who dies within 180 days after the date of filing, you must report the circumstances to the trustee. In all likelihood your inheritance will become part of your bankruptcy estate. If the decedent died more than 180 days prior to the date of filing, the inheritance is yours.

In this context, inheritance means anything you are to receive by inheritance including any beneficial interest in a life insurance policy or death benefit, as a result of a property settlement agreement with your spouse, or as a result of a judgment of dissolution. The critical dates in all cases are the date of death of the decedent, or the date of the agreement or judgment, and the date of bankruptcy filing: not when money or property is actually received. See, Bankruptcy Code Section 541(a)(5).

If you are in a Chapter 13, or perhaps an 11, the situation is different because in those proceedings you enter into a court approved agreement with your creditors – the Plan. In return for you being able to pay your creditors over the length of the Plan so your estate is not liquidated, you agree that your future income and other money you receive during the Plan period may be used to satisfy your obligation to your creditors. Any money you have a right to receive during the Plan period needs to be reported to the trustee. Depending on the amount and nature of the inheritance, and the terms of your Plan, the trustee may require that you devote all or a portion of the funds or property to the Plan.

Can this result be avoided? Yes. If you believe you might be left an inheritance while in bankruptcy, you might want share your financial circumstances. Perhaps it would be best if your inheritance were left to someone else, or any money or property left for your benefit was held in a Spendthrift trust.

Pursuant to Section 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." Thus, assets held in a Spendthrift Trust are not considered part of the bankruptcy estate: only income or property actually received by a debtor during the Chapter 13 Plan period will be considered property of the estate.

A Spendthrift trust must meet certain strict requirements. Any pre-bankruptcy, or post-filing, estate planning is best done by a qualified California attorney.

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