Trustee Blog

Transferring a bankruptcy asset to living trust

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Last week I attended the Inland Empire Bankruptcy Forum’s seminar on “Disclosed and Undisclosed assets in Chapter 7: the Trustee wants to sell my home & steal my exemption! Now what?”

Chapter 7 Riverside Trustee Todd Frealy was a presenter at the event and gave the trustee’s perspective. This post and next post I will talk about what was discussed.

Today we talk about the problem of a debtor transferring a house to a revocable living trust. Generally the debtor is the settlor and the beneficiary under the living trust. During the evening the following was presented:

“Hypothetical: A debtor engages in pre-bankruptcy planning, He transfers the title to his home and other real property to a living trust, naming himself and his kids as beneficiaries. the debtor retains the power to revoke the trust at any time. He does not schedule the trust because his counsel believes that it is not property of the estate”.

The panel discussed this and noted that often the house will not be listed in the petition, but neither will the trust be listed in the petition. The panel said though that while the house may now not be part of the estate, the power to revoke now vested in the chapter 7 trustee. The trustee could revoke the trust and then bring the house back into the estate.

In the materials, The panel wrote: “While assets transferred to a trust do not ordinarily become property of the estate, the powers that a debtor who is a trustee may exercise for his or her benefit become property of the estate. 11 U.S.C. Section 541(a)(1); In re Cutter, 398 B.R. 6, 19 (9th Cir. BAP 2008). A trustee can, standing in a debtor’s shoes, revoke the trust in whole or part, reverting title to any residence back to the estate. Id.; In re Moffat, 107 B.R. 225, 260 (Bankr. C.D. Cal. 1989).

So no matter how you slice it, the trustee gets his hands of the property when in a revocable living trust.

Practice Pointer: List the house in the petition and exempt it if you can, even if in a living trust.



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