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Trust Deemed Part of Estate for Bankruptcy Proceedings.
Posted by: Melville Johnson, P.C.
May 13, 2008
Topic: Trust, Will, and Probate Litigation
The attorneys with Melville Johnson, P.C., can provide legal assistance with Estates and Trust Matters:
Mr. Gerald Taylor handwrote his will, in which he bequeathed all of his assets to his daughter, Ms. Sarah Ann Delmoe. He later added a codicil which bequeathed his assets to his sister to hold in trust for Ms. Delmoe and required the trust to pay his daughter a $600 monthly distribution. After Mr. Taylor's death, Ms. Delmoe began receiving monthly payments from the trust. She then filed for bankruptcy along with her husband. The bankruptcy sought to have Ms. Delmoe's interest in the trust declared as an asset of the bankruptcy estate, and for postpetition payments to be turned over to him.
The attorneys with Melville Johnson, P.C. could provide representation in matters involving estates and trusts. The debtors made several arguments to convince the Court that the trust should be excluded from the bankruptcy proceedings. First, they asserted that the assets of the trust were excluded from the bankruptcy estate under Section 541(c) of the Bankruptcy Code because it was a spendthrift trust necessary for their support. To be considered a spendthrift trust, there must be evidence that the trustor intended to create a spendthrift trust, and that the trust document contained language that effectively restrained the alienability of the beneficiary's interest in the trust property. The Court could find no such intent, and the language of the codicil did not effectively restrain the alienation of the debtor's interest in the property. The trust property could not be excluded as a spendthrift trust.
The debtors also argued that the trust should be excluded because Mr. Taylor had created a support trust. The Court found that a support trust is created if the trust document mandates a distribution of what is necessary for the education or support of the beneficiary. The Court held that the trust was not a support trust because there was no language in the trust document limiting the distributions for any specific purpose.
The last theory for excluding the trust from the bankruptcy estate was that it was exempt under Ohio Rev. Code § 2329.66(A) (11). This section allows an exemption of property that constitutes an allowance or maintenance reasonably necessary for support. In deciding whether this section would apply, the Court considered the common meaning of the words "maintenance" and "allowance" and also weighed the needs of debtors to provide for their families against the rights of creditors to collect what is due them. The Court determined that payments from Ms. Delmoe's trust would have to be in furtherance of her support or subsistence in order to qualify for exclusion from the estate. However, the Court concluded that Ms. Delmoe's trust did not meet this test and was therefore deemed by the Court to be part of the bankruptcy estate.
The information in this summary was primarily derived from The Judicial View
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