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What if you or an adult child has financial problems in the future? Your will, estate planning, trusts and creditor rights.

Adjusting to Changes in Yours and Your Loved One's Lives

Circumstances in peoples' lives change over time.Adult children may developmental or physical health issues ( including becoming wards of the state where an inheritance or trust distribution might exclude them from governmental help or benefits) or encounter serious financial difficulties.

Understanding when property does not become debtor estate property adds value to the planning and drafting process.

Property interests are defined by applicable state law unless there is a federal law interest that requires a different result.  Butner v Unites States 440 U.S. 48, 55-56 (1979)

Adjusting to Changes in Life and Future Planning

Restrictions on transfers of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a bankruptcy case.

If the debtor had no right to the property transferred to a trust then neither do creditors nor a bankruptcy trustee.

If the debtor had no right to obtain possession or control of a trust asset it is not available to pay creditors in a bankruptcy case.

Debtor estates consist only debtor rights and title at the time of case filing. In Re Delauro 207 B.R. 412,415 (Bkrtcy.N.J. 1997).

Spend thrift trusts and Bankruptcy

New Jersey law prevents the assets of a Spend Thrift Trust from being included in a Bankruptcy Debtor Estate.

In re Mosley 42 B.R. 181 ( Bankr. N. J. 1984).

N.J.S.A. 3B:31-38 says:  Whether  or not a trust contains a spend thrift provision ,  a creditor of a beneficiary may not compel a distribution that is subject to the trustee's discretion…even if a beneficiary is the sole trustee or a co-trustee of a trust.

What about Self Settled Trusts?

Bankruptcy Trustees have the rights of Creditors under 11 U.S.C. Sec. 544  (a) and the right to void transfers by the debtor voidable under applicable law under 11 U.S.C. 544 (b).

N.J.S.A. 3B:31-39 says that Whether  or not a trust has a spend thrift provision…..during the life of the settlor revocable  trust assets are subject the claims of the settlor's creditors.

In irrevocable trusts a settlor's creditors or assignees may reach the maximum amount that can be distributed to a settlor or for the settlor's benefit.

Bankruptcy Section 544 and Fraudulent transfers

How far back can a transfer be voided?

Bankruptcy Trustees exercising avoidance powers under 544,545, 547,548 or 553 of the Bankruptcy Code get to bring suit within two years of the case filing, one year of the trustee's appointment or when the case is closed or dismissed.

N.J.S.A. 25:2-31 sets time limits for suit to avoid fraudulent transfers. BankruptcyTrustees and creditors are bound by these time limits. 

Generally four years after the transfer was made or, if longer, one year form when the transfer was discovered. 

Will putting assets in a Trust render the Settlor Insolvent or With Insufficient Assets?

Can create a fraudulent transfer.

Attorneys are not permitted to assist in frauds by moving assets from client obligors to other holding vehicles rendering clit insolvent and client's personal guaranty worthless . Banco Popular North America v Gandhi. 184 N.J. Super 161 ( 2005).

Practice Tips

  • Get reliable lists of assets and debts
  • Discuss current income and expenses
  • Will there be enough income and assets after setting up a trust to allow the settlor to continue to meet business and living expenses
  • Are there heirs or beneficiaries who are disabled, financially troubled or who have other ‘life style' problems or challenges
  • Get the Accountant on Board
  • What about the Medicaid reach back period?

Bankruptcy and Undoing Financial Abuse of the Elderly

Case law focus is on the defalcation and breach of fiduciary duty by a debtor with control of another's assets.

11 U.S.C. 523(a) (4) used to prevent discharge in bankruptcy of debt  owed from reckless handling of assets or other defalcation.

Fraud ( Common Law definition false statement or omission).

Defalcation (grossly  reckless handling of another's money or other assets. See Bullock v Bankchampaign, N.A. 133 S. CT. 1754 (2013).

Embezzlement or Larceny ( Uses a criminal law context See La Fave , Criminal Law Sections 19.2,19.5 and 19.6).

Practice Tips

  • Need not wait for a state court ruling if the fiduciary or executor in control of assets of another files Bankruptcy
  • Be aware of the short time  period for suit to be filed in Bankruptcy. Suit must be filed within 60 days of the date set for the First Meeting of Creditors. See. Fed. R. Bankr. Pro. 4007 ( c )
  • State Court rulings are very helpful but the Bankruptcy Judge must still make an independent inquiry if the facts fit the standard to prevent the debtor from being discharged under Code Esection 523 (a) ( 4 ).


Do you want to know more? Give me a call at 908-782-9333


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