Southern California Bankruptcy Law Blog

Disclaiming An Inheritance

Posted in Chapter 13

Last will and testamentIf you become entitled to receive an inheritance during the pendency of your Chapter 13 bankruptcy, can you disclaim all or part of it?  That was the subject of a few questions that a fellow bankruptcy attorney recently asked me.  I found the exchange interesting, so I am posting it for your edification.

Question 1:

From a procedural standpoint, am I correct that I can amend Schedules “B” and “C” to include the inheritance as an asset and exempt as much as I can under the wildcard?

I.          Amending The Schedules

In the bankruptcy papers, Schedule B is where the debtor lists all personal property, and Schedule C is where the debtor exempts as much assets as possible.

Fed. R. Bankr. Proc. 1009(a) provides in relevant part (with emphasis added):

A voluntary petition, list, schedule, or statement may be amended by the debtor as a matter of course at any time before the case is closed. The debtor shall give notice of the amendment to the trustee and to any entity affected thereby.

Therefore, your client can amend Schedules B and C to list the inheritance and exempt it to the extent possible.

Question 2:

Would the nonexempt portion need to be turned over to the Trustee?

II.        Turning Over An Inheritance To The Trustee

This question was answered in the affirmative in the very recent Bankruptcy Appellate Panel for the Ninth Circuit case, In re Dale, AZ-13-1251-DPaKu (B.A.P. 9th Cir. Fe. 5, 2014).

In Dale the Chapter 13 husband debtor became entitled to an inheritance more than 180 days after the couple filed their bankruptcy papers.  The Chapter 13 Trustee demanded turnover of the inheritance.  Based on 11 U.S.C. § 541(a)(5) the debtors argued that the Trustee was not entitled to the money because the inheritance was not part of the bankruptcy estate (with emphasis added):

The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: . . .

Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date

(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or

(C) as a beneficiary of a life insurance policy or of a death benefit plan.

However, the Dale Court held that 11 U.S.C. § 1306(a)(1) put the inheritance into the estate, and as such it had to be turned over to the Trustee (with emphasis added):

Property of the estate includes, in addition to the property specified in section 541 of this title —

(1) all property of the kind specified in such section that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 11, or 12 of this title, whichever occurs first.

Applying the Dale holding to my friend’s client’s case, since any nonexempt portion of the inheritance belongs to the estate, his debtor would have to remit the money to the Chapter 13 Trustee.

Question 3:

My client asked me this:  Can the non-exempt portion be disclaimed at this point so he can gift it to relatives?

III.       Disclaiming Means No Control Over The Inheritance

The relevant statute is Cal. Prob. Code § 275-288.

My friend’s client was certainly entitled to disclaim any interest in the inheritance pursuant to § 275:  “A beneficiary may disclaim any interest, in whole or in part, by filing a disclaimer as provided in this part.”

However, his client wanted to do more than that:  He wanted to have control over a portion of the money he wished to disclaim by giving it to relatives.

Subsections 285(a) and (b) provide in relevant part (with emphasis added):

(a)  A disclaimer may not be made after the beneficiary has accepted the interest sought to be disclaimed.

(b) For the purpose of this section, a beneficiary has accepted an interest if any of the following occurs before a disclaimer is filed with respect to that interest:

(1) The beneficiary, or someone acting on behalf of the beneficiary, makes a voluntary assignment, conveyance, encumbrance, pledge, or transfer of the interest or part thereof, or contracts to do so . . .

Thus, his client could not disclaim his interest in the nonexempt portion if he gave it to relatives.

Section 283 provides:  “A disclaimer is not a fraudulent transfer by the beneficiary . . . ”  However, if my friend’s client were to give the nonexempt portion to relatives (thus making it impossible for him to disclaim), he would thereby make a fraudulent transfer (which I have discussed in great detail in previous posts).

Let’s be honest here:  My friend’s client wanted to make the transfer to shield the asset from the legitimate claims of his creditors who were being paid through the plan.  Since the Chapter 13 Trustee can avoid such a transfer under 11 U.S.C. § 548(a), the debtor would not accomplish his goal.  Moreover, if he subsequently had to convert to Chapter 7, he would be denied a discharge pursuant to § 727(a)(2)(B):

 The court shall grant the debtor a discharge, unless — . . . the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, . . . , or has permitted to be transferred, . . . property of the estate, after the date of the filing of the petition.

If you are facing insurmountable debt and are concerned about the possibility of receiving an inheritance, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.

 

 Image courtesy of Flickr (Licensed) by Ken Mayer