Trust-held property creates special problems for protecting your home in Bankruptcy
Protecting trust assets which were transferred to a nominee trust, primarily for estate planning purposes creates unique issue in a Chapter 7 Bankruptcy. If you have transferred your house to a trust (or are considering doing so) and want to protect it in the event of a Chapter 7 Bankruptcy Filing, read on. There are a number of factors that all address whether or not a debtor's house is exempt from the bankruptcy estate, or whether the bankruptcy court could require the debtor to sell his property to pay some (or all) of his debts. For example, whether or not the debtor actually resides in the subject property or if it is held as an investment property; the total net equity in the property, including mortgages or other liens; and the debtor's exemption elections could all affect how a debtor can protect (or, conversely, risk) a house and your other various assets upon filing a Chapter 7 petition. First, in Massachusetts, recall that there are two separate exemptions schemes which define what types of property you are allowed to retain, and cannot be sold by the Chapter 7 Trustee to be distributed to your creditors: Federal Exemptions and Massachusetts Exemptions. Generally speaking, the federal exemptions are better suited to protecting your tangible personal property, such as automobiles, bank accounts, etc., but cannot protect more than approximately $21,625.00 worth of equity in a homestead. In situations where you are seeking to protect more than $21,625 in home equity, the Massachusetts Exemptions can protect up to $500,000.00 in home equity, at the cost of significantly reduced exemptions for personal property (i.e., $700.00 equity in an automobile, for example). The caveat is that in order to benefit from the Massachusetts Exemptions, you must file and record a Massachusetts Declaration of Homestead. Ownership of real property through a nominee trust creates a legal impediment to protecting your equity in your home, however, in certain circumstances, the court has essentially ignored this impediment. In situations where a trust is the legal titleholder of the debtor's residence, and not the debtor, there is a legal question of whether the debtor is still permitted, by law, to file a Massachusetts Declaration of Homestead. A 2007 Massachusetts Bankruptcy Court case titled “In re: Edward R. Szwyd" decided that “property held in trust is not eligible for Homestead protection. Only individuals may claim a Homestead." However, in Szwyd, the debtors nevertheless filed a homestead declaration and the Court allowed the Homestead to stand. In this case, the debtor was the sole trustee and beneficiary and no trust existed under Massachusetts law, because the legal protections of the trust merged into the sole trustee and beneficiary, making the debtor the sole beneficial “owner" for purposes of the bankruptcy code. We would observe a similar result if the debtor were attempting to protect a second home or investment property held in a trust and not the debtor's primary residence. Depending on the level of equity in the debtors' primary residence - the one not in the trust - 11 U.S.C. 522(d)(1) would exempt $21,625.00 of net equity in the home, ($43,250.00 for a joint filing). In Massachusetts, the Debtor could elect to file under the Massachusetts exemption scheme, and under M.G.L. c. 188 s. 1, could protect up to $500,000.00 worth of home equity. There is no specific exemption to protect a second home, however, depending on the net equity (or lack thereof) in the primary residence, 11 U.S.C. 522(d)(5) permits the debtors to exempt any unused portion of their 11 U.S.C. 522(d)(1) exemption - including all $21,625.00 of it - if the primary residence had no equity or the debtor's intention was to surrender it to the secured lender or the property had no equity.