Funding a trust prior to filing

[eap82]

Hi,

I'm new here and have questions that are keeping me up at night! I recently had a revocable trust established and my house funded into this trust. I am the trustee unless I die or become incapacitated. This required a change to the deed to update the owner as the trust although the property is mine and I can do with it as I please. I am preparing to file chapter 7 in the next 3 months. It never even occurred to me until today that funding my trust with my house may be a problem. I'm definitely going to disclose this to my lawyer, no secrets. I was hoping someone could give me peace of mind this hasn't screwed my filing.

[justbroke]

Welcome to BKForum.

Because that's a revocable trust, the bankruptcy Trustee will step into your shoes and dissolve the trust or force a sale. You need to speak to a bankruptcy attorney that specializes in Trusts. The reason is that the bankruptcy Trustee steps into your shoes and can do anything that you can do, including anything you can do as Trustee of your Revocable Trust. I assume that means the the bankruptcy trustee can force a sale or revoke the trust.

I don't know if there is anything you could or should do, today, to fix that particular issue.

But wait... there's more. You are in Florida anyhow, so I don't know why you needed a Trust to protect the property. Outside using it as an estate planning tool, such as a living trust to avoid probate, Floridians enjoy an unlimited homestead exemption. In Florida a homestead property is 100% exempt from attachment from the bankruptcy and non-consensual creditor liens.

Have your attorney see Engelke v. Estate of Engelke, 921 So.2d 693, 696 (Fla. 4th DCA 2006). for the proposition that the homestead is still available. See also In re Alexander, 346 B.R. 546, 19 Fla. L. Weekly Fed. B 356 (Bankr.M.D.Fla. Jul 25, 2006), and In re Edwards, — B.R. —-, 2006 WL 3788803 (Bankr.M.D.Fla. Oct 04, 2006).

Do not do anything on your own. You need this reviewed by a competent bankruptcy attorney.

[eap82]

Hi Justbroke, thanks for your reply! Funding the trust was an estate planning tool and in no way trying to protect an asset from bankruptcy, wasn't even a thought in my mind. Do you mean I can't use my homestead exemption now that it's in a trust?

[despritfreya]

You need to discuss this with an attorney pronto. Some states, like Arizona, have specific statutes that protect a debtor's homestead residence when transferred into a revocable trust. Others do not.

For Arizona, any property, other than the homestead residence, placed in a trust loses its exemption and will need to be properly re-conveyed to the debtor before a bankruptcy is filed.

Do not transfer any other property into the trust until you have discussed this with a local attorney.

Des.

[justbroke]

As despritfreya just wrote and I wrote earlier, don't take any further action to do or undo what you have already done. As I wrote above, the Florida Supreme Court already ruled on this and the Florida Bankruptcy Courts have come into alignment with the Florida decision. (Engelke is the law in Florida.) If you are both the beneficiary and the Trustee, you may actually still have the homestead protection without doing anything. However, as Des wrote, you could lose -- or have already lost -- the interest if it wasn't your Florida homestead.

I'll say it again to reinforce my thoughts... seek competent bankruptcy counsel that understand trust law and the impact of Engelke and the Florida more recent bankruptcy court decisions. (There was a prior decision which ran contrary to Engelke, but Engelke became the law for Florida.)

[eap82]

Thank you both. More sleepless nights ahead thanks to this mess I created.

[justbroke]

Thank you both. More sleepless nights ahead thanks to this mess I created.

Why sleepless? Florida allows the so-called unlimited homestead exemption to still be used if it is a homestead property and you are the beneficiary. For Florida, a resident could own a $8,000,000 mansion outright (for at least 2+ years) and it would not be subject to liquidation in a Chapter 7 bankruptcy.

What we are saying is do not try to "fix" anything by messing with the title. Allow a Florida-licensed attorney to review what you have done and validate that it is still protected. The key will be was it your homestead before you placed it into a trust and are. For Florida, the Alexander bankruptcy case confirmed that the beneficiary of the unlimited homestead exemption need not hold "bare legal" title to the property, but simply an ownership interest. The Engelke case, which was a Florida supreme court case, is what laid the groundwork.

Do you mean I can't use my homestead exemption now that it's in a trust?

I never directly answered earlier question, so here it is.

No, I don't think that you can't use your homestead exemption for Florida. We think you're okay, but you'll need to review this with a Florida bankruptcy attorney. Do not ask your estate attorney unless they practice bankruptcy as well.

If you are truly the beneficiary of that property and are the rightful owner, your interest is protected by the Florida unlimited homestead exemption by law (and caselaw). This is why we keep asking whether this was your homestead that you placed into a revocable trust and you're the Trustee and beneficiary.

(The additional info we added because this differs by State and homestead status and we didn't want to confuse others who may read this in the future.)