Are you an estate planning lawyer in Minnesota? I am not. I am the managing partner at LifeBack Law Firm, Minnesota’s largest bankruptcy law firm. And I am writing this article to highlight some issues we bankruptcy lawyers see often; including pitfalls and how to avoid them. When you meet with your estate planning clients, I suspect the subject of bankruptcy does not come up often. In other words, how is what you are doing with the client, in terms of estate planning, impacting a non-client heir who needs to file bankruptcy?
Here is an example I ran into once. I had a young couple meet with me about a 60k credit card problem. From all appearances, this young couple, with 3 children, were an easy Chapter 7 Bankruptcy case. Not so fast. It turns out his grandpa was not impressed with his dad or aunts and uncles at all. So grandpa decided to put his farm in his name and my client’s name as joint tenants. That might have served grandpa’s estate planning purpose, but it totally derailed my client’s ability to file Chapter 7 Bankruptcy without implicating the farm worth at least $750k.
I told my client: because of grandpa’s estate planning choices, you should not file a Chapter 7 Bankruptcy but you will need to file a pay in full Chapter 13 Bankruptcy or avoid bankruptcy altogether and look to grandpa to help pay your debts since he placed you in this pickle.
This example illustrates the problem perfectly. Grandpa, while solving a perceived estate planning problem, handicaps my client from filing a Chapter 7 Bankruptcy forcing him into two untenable choices given his family finances.
Another common example we see are remainder interests. I cannot tell you how often remainder interests have created bankruptcy problems. For one thing, our bankruptcy client is often unaware they even own a remainder interest because your clients are not telling our clients about them. Do you know when our clients find out about a remainder interest? When the life estate holder passes away and the property is being sold and the title insurance company notices one of the remainder interest people have filed a bankruptcy and the remainder interest has not been disclosed on the bankruptcy case. How can a remainder interest be disclosed when the bankruptcy client had no idea it existed?
How does this play out after it has been discovered? The closing on the property comes to an immediate halt. Debtor is required, if his bankruptcy is closed, to re-open the case and amend their bankruptcy schedules including exemptions and wait until trustee’s deadline to object to exemptions passes. Do you think the buyer of the property and our client’s brothers and sisters find this delay funny? I assure you they certainly do not. Neither does our client who now has brothers and sisters that know she filed bankruptcy. Plus, our clients pay to re-open and amend. No one is happy.
There is a simple solution to this problem. Utilize trusts and stop adding children to deeds in any fashion. Do not add anyone as remainder interests and do not add anyone to the deed while your client is alive. Instead, consider utilizing a trust to own the property.
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