Question about inheritance/distribution from a trust

[patrick3]

Hi all, looking for some help/guidance here.

I was literally a couple weeks out from filing ch 7. My attorney had everything and was preparing the filing. Then I found out my father died suddenly.

He had set up a trust which I knew about - but I had no idea what the terms were. As it's laid out, I will be getting a $500 monthly distribution for the rest of my life.

I am now 36 years old. I live in Colorado. My debts are all CC and total almost $77,000. I don't have a job.

My attorney says there is no statute of limitations on the trustee seizing those monthly distributions until the entire debt is paid off. But in the next breath, he sort of says that typically a trustee will only keep the bk file open for a few years if within that time the entire debt won't be covered.

Anyone with experience on this? What are my options? Could i go ch 13 even though I dont have a job and this would be my only income? Is it possible that moving to another state will benefit me if that state has better protections? I probably wouldn't mind losing out on a couple years worth of distributions to make this go away but how would I know it wouldnt remain open? And does that mean my bk case would not be discharged before then?

Appreciate any help, thanks.

[HHM]

That analysis doesn't seem accurate. Assuming you have NO way to get access to the trust Corpus (the money), then the $500 per month is simply income. The question then becomes whether you still qualify for chapter 7 bankruptcy with this additional income, if yes, you should be fine. If no, then consider a chapter 13. However, I think looking at this as an asset is the wrong idea, it is income.

However, the issue is arguable and an aggressive trustee may take the contrary position.

A couple things you need to clarify.

1. How aggressive is your attorney and did you pay him to fight something like this (for most bargain attorney, going to a hearing on this issue is extra fees to you).
2. What is your risk tolerance (assuming you would still qualify for chapter 7), are you willing to risk having $5,000 taken (that is what the trustee is likely to want to "split the difference"

The fact is, the extra $500 is not going to be enough to dig out of a $77K debt. So you still NEED to file BK.

[patrick3]

Thanks so much for the insight. I am no expert, but my initial thought was that it would be considered as income, since its a regular monthly distribution and it appears there is no way for me (or the bk trustee) to touch the principle amount in the trust (as if my dad was still alive and simply gave me $500 a month). And since it would essentially be my only income at this point since I dont have a job, it would only total $6,000 a year so ch 7 would/should still work. My attorney did specifically say it would NOT be treated as income - like wages - because this was from an inheritance. So it sounds like you are saying something different (and maybe its up to the court to decide the issue??).

Going in, this was just going to be a painless no-asset ch 7. So our original agreement was based on that (for which I've already paid in full).

So in answer to your questions -

1. Would the hearing be to determine if this was an asset or an income, or something else? And would that be more of a specialized area for a bk attorney or something any attorney could do? I don't mind paying the extra fee (since the circumstances have changed) as long as he knows what he is doing (which might be debatable at this point).

2. Can you clarify what I would be risking? I don't think I understand what amounts I would be "splitting the difference" between? My biggest concern would be that the bk trustee can keep taking the distribution for years and years if there is nothing in the law that would prevent them from doing that. If there is zero chance of that happening, I guess I need to know what actually IS at risk here? If its just a couple years worth of distributions - say $12,000 - and you are saying I could settle for half that to bring it to a close, I think I would be totally fine with that.

[despritfreya]

What you have is a "life estate" in a Trust with a guaranteed distribution of $500.00 per month. It is a receivable - you are owed money and, it is an asset of the estate. The question is "is it protected - can the Trustee get at it?". If there is no valid protection (maybe a spendthrift provision that is enforceable ), the Trustee steps into your shoes and is entitled to collect the month distribution. You are 35 years old. The Trustee is not going to keep your case open for the rest of your life. What he is going to do is sell the right to the distribution based upon some "present value" taking into consideration your life expectancy.

Again, the question is “can the Trustee assign the right to the monthly distribution”. You need to be discussing this with an estate planning attorney as well as a bk attorney. You need to determine whether or not the asset is “assignable” under the terms of the trust and under State law. (See 11 USC 541 (c)(2)) .

Des.

[patrick3]

What you have is a "life estate" in a Trust with a guaranteed distribution of $500.00 per month. It is a receivable - you are owed money and, it is an asset of the estate. The question is "is it protected - can the Trustee get at it?". If there is no valid protection (maybe a spendthrift provision that is enforceable ), the Trustee steps into your shoes and is entitled to collect the month distribution. You are 35 years old. The Trustee is not going to keep your case open for the rest of your life. What he is going to do is sell the right to the distribution based upon some "present value" taking into consideration your life expectancy.

Again, the question is “can the Trustee assign the right to the monthly distribution”. You need to be discussing this with an estate planning attorney as well as a bk attorney. You need to determine whether or not the asset is “assignable” under the terms of the trust and under State law. (See 11 USC 541 (c)(2)) .

Des.

Thanks for more insight. Im so grateful for forums like this because at least they help with figuring out what questions I need to be asking.

Regarding the spendthrift provision, that was something I was aware of, but there is no specific wording in the trust that calls itself "spendthrift" per se. I will look into the "assignable" part. Off hand, I guess I dont know why someone (my father) would go to the trouble of setting up a trust and then allow for it to somehow be "assignable" to anyone else, but maybe there are reasons why that would be needed. Im sure my father didnt know I would end up in this situation though, so maybe he wasn't thinking in those terms of protecting the trust or the distributions from a bk preceding...

I still dont understand the "settling" part. You added a bit more there regarding the determination of a present value amount that the trustee will determine. Is there some set calculation that anyone would make in that situation or is it open to interpretation (as in, they come up with a high figure and my attorney and I would then negotiate a settlement from there?).

[HHM]

What he is referring to is the Net Present Value calculation.

It is open to some interpretation. With interest rates low, the Net Present Value is higher than if interest rates were higher. The NPV is sort of like a comparison, and it asks, how much cash would need to be invested TODAY to receive a similar rate of return. (this is the calculation used by lotteries and those ads you see on TV offering cash now for your structured settlement payments).

But Desp raises good points, you need to explore the spendthrift feature, if any, and the assignability. Spendthrift is pretty common in these sorts of estate planning instruments so you probably have nothing to worry about, but you need to get the originating documents to verify.

[patrick3]

Morning. Hopefully this will pop back up and get the attention/responses from HHM or despritfreya (or anyone else in the know).

So I have the documents. I don't see any variation on the words "spendthrift" or "assignability". Here are a couple items that might apply.


Item #1 - Under article V. (A) it says " if at any time a beneficiary eligible to receive net income is under legal disability, or in the OPINION (my emphasis) of the trustee is incapable of properly managing his/her finances, then the trustee may makes distributions to a lawful guardian or custodian, or may otherwise expend the amounts to be distributed for the benefit of the beneficiary in such a manner as the trustee considers advisable."

(To me, this seems like the trustee has the ability to make the monthly payments to someone else until my BK is discharged since, because of the impending BK, it would seem obvious that I can't manage my finances ) - Agree?


Item #2 - Article V. (D) - "Except as otherwise provided by law, no power of appointment or power of withdrawal shall be subject to involuntary exercise, and no interest of any beneficiary shall be subject to anticipation, to claims for alimony or support, to voluntary transfer without the written consent of the trustee, or to involuntary transfer in any event."

(Would a creditor be "an interest" of mine? And does the "except as otherwise provided by law" clause include what bankruptcy trustee might have the power to do and therefore trump everything else?)

I hope I am quoting the correct parts of the agreement. They seem to be the only ones that apply, from what I can tell. So - does this shed anymore light on my situation? Thanks!

[despritfreya]

Patrick,

Sorry that I cannot be of help. Trust formulation and enforcement is out of my area of expertise. You really need to sit down with an estate planning attorney to determine if the distribution can be assigned under State law.

Maybe others will have a more informative comment.

Des.