The fraudulent transfer of a debtor’s home to a revocable trust won’t put the debtor at risk of losing her homestead exemption, at least in Ohio, according to Bankruptcy Judge John P. Gustafson of Toledo.
The outcome turned on four words in Section 522(g): “that the trustee recovers.”
The debtor purchased a home in 2013. Later, she became a defendant in a lawsuit. One month before she was hit with a $20,000 judgment, the debtor transferred her home to a revocable trust, of which she was the trustee and the lifetime beneficiary. As a grantor trust, the debtor had the right to terminate the trust at any time. The trust had spendthrift provisions that would be unenforceable in Ohio because the trust was revocable.
Within two years of transferring the home to the trust, the debtor filed a chapter 7 petition and claimed a homestead exemption in the home. The trustee conceded that the debtor resided in the home but objected to the homestead exemption. The trustee also threatened to avoid the transfer to the trust and recover the home for the benefit of the estate.
The debtor argued that she was entitled to her homestead exemption even if the trustee were to set aside the transfer to the trust.
To avoid slogging through an avoidance action only to learn that the debtor had a valid homestead exemption, the trustee and the debtor agreed to put the question about the validity of the homestead exemption to Judge Gustafson on the assumption that the transfer was avoidable.
The answer lay in the language of Section 522(g), which provides that
the debtor may exempt . . . property that the trustee recovers under section . . . 550 . . . of this title, to the extent that the debtor could have exempted such property under subsection (b) of this section if such property had not been transferred, if — (1) (A) such transfer was not a voluntary transfer of such property by the debtor; and (B) the debtor did not conceal such property. [Emphasis added.]
Assuming the trustee could avoid the transfer to the trust, Judge Gustafson said that “the Debtor would be prohibited from claiming an exemption in that recovered property” under Section 522(g) because the transfer was voluntary. However, that wasn’t the end of the story. Section 522(g) remained the debtor’s salvation.
The trust created a life estate for the debtor, giving her the right to reside in the home for the duration of her life. Judge Gustafson said that the “more difficult issue involves the property that the Debtor had at the time of filing — the interest the Debtor had as a ‘lifetime beneficiary with respect to the Property under the Trust.’”
In other words, Judge Gustafson said, the debtor’s interest in the real estate as a lifetime beneficiary “became part of her Chapter 7 bankruptcy estate upon the filing of her Chapter 7 case.”
In a different case three years earlier, Judge Gustafson had held that “a lifetime interest in property created through a trust was a sufficient interest to support a homestead exemption in Ohio.” In re Vess, 2018 WL 722408, at *5, 2018 Bankr. LEXIS 298, at *12 (Bankr. N.D. Ohio Feb. 5, 2018). However, Vess did not involve an avoidable transfer.
To answer the question when there was an avoidable transfer, Judge Gustafson focused on four words in Section 522(g) and said, “the statute only limits a debtor’s right to claim an exemption in property ‘that the trustee recovers.’”
Because the debtor’s interest as a lifetime beneficiary was already estate property when the debtor filed her chapter 7 petition, Judge Gustafson said that the life estate “does not need to be recovered.”
The debtor had the right to claim an exemption in the life estate that she held at filing, because that interest would not be recovered by the trustee in avoiding the transfer to the trust.
If the trustee were to avoid the transfer to the trust, Judge Gustafson said that the “Debtor’s homestead exemption will be limited to her equity in the value of her ‘lifetime beneficiary interest’ in that property.” He did not venture a guess about the valuation of the life interest.
The fraudulent transfer of a debtor’s home to a revocable trust won’t put the debtor at risk of losing her homestead exemption, at least in Ohio, according to Bankruptcy Judge John P. Gustafson of Toledo.
The outcome turned on four words in Section 522(g): “that the trustee recovers.”
The debtor purchased a home in 2013. Later, she became a defendant in a lawsuit. One month before she was hit with a $20,000 judgment, the debtor transferred her home to a revocable trust, of which she was the trustee and the lifetime beneficiary. As a grantor trust, the debtor had the right to terminate the trust at any time. The trust had spendthrift provisions that would be unenforceable in Ohio because the trust was revocable.
Within two years of transferring the home to the trust, the debtor filed a chapter 7 petition and claimed a homestead exemption in the home. The trustee conceded that the debtor resided in the home but objected to the homestead exemption. The trustee also threatened to avoid the transfer to the trust and recover the home for the benefit of the estate.
The debtor argued that she was entitled to her homestead exemption even if the trustee were to set aside the transfer to the trust.