Trust assets not recoverable by trustee in bankruptcy, but language of trust the key

Charlotte Bankruptcy Lawyer Bryan W. Stone of Arnold & Smith, PLLC answers the question “Are my 401k and IRA protected in bankruptcy?”


A District Court’s reversal of a bankruptcy court’s application of Section 548(e) of the Bankruptcy Code to a portion of trust assets has bankruptcy insiders breathing a sigh of relief. As Forbes reports, absent the reversal, bankruptcy trustees would have had broad authority to seek to set aside legitimate trust activities in order to seize trust funds for the benefit of creditors.

Smiling Woman Huntersville Bankruptcy Lawyer Charlotte Chapter 7 AttorneyThe case involved a trust created in 1997 by Faith Campbell. Campbell did what many people facing their own mortality and planning the future that extends beyond their own life do—she developed an estate plan that included the creation of a living trust for the benefit of her four children.

Campbell died a decade later, in 2007. One of her four children—Linda (along with her husband)—declared bankruptcy in 2011. The question for the bankruptcy court was whether a portion of the assets that Faith Campbell placed in the living trust for her children’s benefit could be considered “assets” of Linda’s in the context of her bankruptcy.

The bankruptcy court decided that “Linda’s beneficial interest in the Living Trust were indeed includable in her bankruptcy estate and thus accessible by the Bankruptcy Trustee,” according to Jay Adkisson, writing for Forbes.

Linda and the trustee of the Faith Campbell Living Trust—J.T. Del Alcazar—objected to the bankruptcy court’s decision, triggering a review by the United States District Court for the Northern District of Illinois. That court reversed the decision of the bankruptcy court.

In order to determine whether Linda’s interest in the trust were her “assets” for bankruptcy purposes, the District Court looked to the language of the trust, which provided that the trust terminated at the moment of Faith Campbell’s death.

Except it did not, and in fact the trust invested in the trustee many duties that “would keep the Trust alive after Faith’s natural expiry had been reached,” so that the trust “continued to live a vibrant existence even as of the time that Linda commenced her bankruptcy case.” Courts do a funny thing when confronted with clauses in trusts that are impossible to square with reality: they ignore them.

Other provisions in the trust prevented Linda from using trust assets as collateral for loans or from otherwise “encumbering” them. The trust also prevented her from selling the assets. These protections are called “spendthrift” provisions.

Linda’s bankruptcy trustee may have been aggressive in seeking to classify her interest in the trust as “assets” for bankruptcy purposes because a portion of the trust funds had been segregated from other funds into a separate account, possibly to be distributed to Linda and possibly to keep them away from her creditors. The trustee sought to reverse this transaction pursuant to Section 548(e) of the Bankruptcy Code, which allows trustees to recover assets that are transferred with the “intent to hinder, delay, or defraud” creditors.

As Adkisson wrote, bankruptcy insiders were concerned that if the bankruptcy court’s ruling were upheld, “virtually every living trust [would be] susceptible to being set aside as a ‘self-settled trust.’”

If you find yourself needing the services of an experienced Charlotte, North Carolina bankruptcy attorney, please call the skilled lawyers at Arnold & Smith, PLLC find additional resources here. As professionals who are experienced at handling all kinds of bankruptcy matters, our attorneys will provide you with the best advice for your particular situation.



About the Author

Bryan 1Bryan Stone is a Partner with Arnold & Smith, PLLC, where he focuses his practice on all aspects of bankruptcy, including: Chapter 7, Chapter 11, Chapter 13, home loan modifications and landlord-tenant issues.

A native of Macon, Georgia, Mr. Stone attended the University of Georgia, where he earned a BBA in Banking and Finance, and Wake Forest University School of Law, where he obtained his law degree.

Following law school, Mr. Stone relocated to Charlotte, where he currently serves as Chair of “Bravo!” – a young professionals organization associated with Opera Carolina – and founded the University of Georgia Alumni Association of Charlotte.

In his spare time, Mr. Stone enjoys perfecting his barbeque skills for the annual “Q-City BBQ Championship” and playing softball in the Mecklenburg County Bar softball league.






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