Removing a debtor as a beneficiary of a revocable, inter vivos trust is not a transfer that a trustee can set aside. A contrary result “would turn the privacy of estate planning into a minefield for both (trust) trustees and beneficiaries,” Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif., said.
Elderly parents created a revocable, inter vivos for their nine children. Evidently, the trust had substantial assets.
A daughter was in financial trouble. After conferring with her, the parents removed her as a beneficiary of the trust. After the change, the daughter filed a chapter 11 petition in 2016 that was converted to chapter 7 in 2017.
In 2018, the chapter 7 trustee sued the parents and the siblings, but not the bankrupt daughter. The suit included claims under Section 544 for avoidance of a transfer and for imposition of a resulting trust. The bankruptcy trustee alleged that the parents did not want the daughter’s creditors to be beneficiaries of any distributions under the revocable trust.
The defendants made a motion for judgment on the pleadings under Rule 12(c), which Judge Clarkson granted in his November 17 opinion.
Before Judge Clarkson ruled, the bankruptcy trustee dismissed his fraudulent transfer claim under Section 548. However, the trustee maintained a claim under Section 544 and the Federal Debt Collection Procedure Act, 28 U.S.C. § 3301, et seq.
The trustee contended that he could step into the shoes of the Internal Revenue Service, which allegedly held a claim. Section 3306(a)(1) permits avoiding a “transfer” to satisfy a debt owing to the U.S. Judge Clarkson was therefore called on to decide whether removal of the daughter as a beneficiary was a voidable “transfer.”
Just as it would have been were there a claim for preference or fraudulent transfer under the Bankruptcy Code, Judge Clarkson found no “transfer” under Section 3306(a)(1). The outcome was a result of California’s trusts and estates law.
Under both California and federal law, Judge Clarkson said that removing “the Debtor before the filing of her bankruptcy case, as a beneficiary to the revocable trust by the Parents, was not a ‘transfer’ of any interest of the Debtor in property or ‘assets’ under California law, and the alleged property is not property of the bankruptcy estate under federal law.” He noted that the parents could, “at their pleasure,” remove any assets from the trust or terminate the trust.
In California, Judge Clarkson said, a revocable trust can be revoked or altered “in any way during the settlor’s lifetime.” Consequently, he said, “Any beneficiaries’ interest in such a trust is an expectancy only, as long as it is not vested. The settlor can eliminate that expectancy interest at any time. Under the provisions of the Parent’s Trust, when one settlor dies, the trust becomes irrevocable, and the beneficiaries’ interest in the Trust vests.”
Therefore, property in a revocable inter vivos trust is not property of a beneficiary until a settlor dies, and the parents were still very much alive. Therefore, Judge Clarkson said, “the Debtor had no property interest in the revocable Trust at the time that she was removed as a beneficiary, but rather her interest was merely an expectancy interest — the Debtor never acquired an interest in property and she never transferred any such interest.”
There must be a transfer of property before there can be avoidance under Section 544(b) and the FDCPA. Judge Clarkson held that removing the daughter as “a beneficiary in a revocable trust prior to the debtor/beneficiary’s filing of the bankruptcy is not a transfer of property of any type.”
There having been no transfer, Judge Clarkson dismissed the claim aiming to avoid removal of the daughter as a beneficiary.
Next, Judge Clarkson addressed the trustee’s claim for imposition of a resulting trust. He exhaustively analyzed California law on resulting trusts, along with federal cases. It came down to this, in the judge’s words: “For a resulting trust to be equitably created, a property transfer is required.”
Having already decided there was no transfer, Judge Clarkson dismissed the resulting trust claim, saying it was a “non-starter.” He granted the defendants’ motion to dismiss the complaint on the pleadings.
Removing a debtor as a beneficiary of a revocable, inter vivos trust is not a transfer that a trustee can set aside. A contrary result “would turn the privacy of estate planning into a minefield for both (trust) trustees and beneficiaries,” Bankruptcy Judge Scott C. Clarkson of Santa Ana, Calif., said.
Elderly parents created a revocable, inter vivos for their nine children. Evidently, the trust had substantial assets.
A daughter was in financial trouble. After conferring with her, the parents removed her as a beneficiary of the trust. After the change, the daughter filed a chapter 11 petition in 2016 that was converted to chapter 7 in 2017.
In 2018, the chapter 7 trustee sued the parents and the siblings, but not the bankrupt daughter. The suit included claims under Section 544 for avoidance of a transfer and for imposition of a resulting trust. The bankruptcy trustee alleged that the parents did not want the daughter’s creditors to be beneficiaries of any distributions under the revocable trust.
The defendants made a motion for judgment on the pleadings under Rule 12(c), which Judge Clarkson granted in his November 17 opinion.
Before Judge Clarkson ruled, the bankruptcy trustee dismissed his fraudulent transfer claim under Section 548. However, the trustee maintained a claim under Section 544 and the Federal Debt Collection Procedure Act, 28 U.S.C. § 3301, et seq.
The trustee contended that he could step into the shoes of the Internal Revenue Service, which allegedly held a claim. Section 3306(a)(1) permits avoiding a “transfer” to satisfy a debt owing to the U.S. Judge Clarkson was therefore called on to decide whether removal of the daughter as a beneficiary was a voidable “transfer.”