This past week, I received a call from one of my Chapter 7 clients. Earlier this week, he had received a call from his brother advising him that he was a beneficiary of the estate of a great aunt who had passed away earlier this year. According to my client, his interest in this estate was in the form of a 1/9 share of two parcels of property. The other 8 shareholders were cousins, some of whom he barely knows. My client estimates that the value of the property is between $400,000 and $500,000, meaning that 1/9 of this bequest is worth $50,000 at most.
What happens now and what can this case teach us?
The Bankruptcy Code provides that an inheritance becomes part of a debtor’s Chapter 7 estate if the decedant (i.e. the great aunt) died before the case was filed or within180 days after the filing. It does not matter if the estate was not probated or funds distributed – the relevant date is the date of death of the person leaving the property, which triggers the claim of the debtor.
In my client’s case, his great-aunt died earlier this year, before he filed his Chapter 7 case.
Because the inheritance is property of the estate, I will need to amend the petition to reveal this asset. Since my client did not use up his “wildcard” exemption, I can exempt about $5,000 of the inheritance. This means that when the estate is settled, my client will get a check for $5,000.
Because this inheritance is part of the estate, the Chapter 7 trustee steps into my client’ s shoes for purposes of liquidating the estate’s interest. What will most likely happen – the trustee will contact the executor and the other beneficiaries and ask them to buy out the estate’s interest, possibly at a discount since the asset is not liquid. I would not be surprised to see the trustee settle the estate’s claim for $30,000 or possibly even less.
My Bankruptcy Law Network colleague Dana Wilkinson also wrote about this issue back in October, 2007. She notes that a spendthrift trust can protect a debtor if the decedant sets up his/her will that way.
I think that any individual who is contemplating bankruptcy should think about the possibility of inheritance and discuss this issue with his lawyer. If the potential bequest is coming from a parent or other close relative who would be amenable to creating a family trust, this tactic may be an appropriate form of estate planning.
As noted above, if the debtor’s interest already exists (but has not yet been distributed) that information needs to be provided to the attorney as well.