In In re Blasingame, 2018 WL 2084789 (B.A.P. 6th Cir. May 3, 2018), the Sixth Circuit Bankruptcy Appellate Panel demonstrates that trusts can be used to protect assets from the reach of creditors in the context of a bankruptcy.
In late 1993, a man owed $4 million to a bank which was secured by several assets including his home. The bank intended to foreclose on the residence, but had stated that it would release its lien on the home in exchange for a payment of $490,000. His mother hired a trusts and estates lawyer who advised her to pay the bank the $490,000 and then transfer equitable title of the home back to her son and his wife through a trust. The son and wife became co-trustees, and they, along with their children and others, became beneficiaries and contingent beneficiaries of the trust.
Two decades following the creation of the trust, the son and wife filed chapter 7 bankruptcy petitions while still living in the home. A creditor of theirs then sued them in the name of the trustee, arguing that their interest in the home was a transferable legal life estate. The creditor asked the court to compel the couple to turn the home over to the trustee. Both parties agreed, however, that the trust did have title to the home.
The bankruptcy court held that the debtors had an equitable life estate, which gave the couple no more than the right to live in the home. The creditor subsequently appealed. On appeal, the Sixth Circuit’s Bankruptcy Appellate Panel upheld the bankruptcy court’s opinion, relying principally on the language of the trust instrument.
The language of the trust stated that the home was to be the residence of the son and his wife during their lifetimes and named four other individuals that could live in the home upon their death. Several provisions made clear that the right of the husband, wife, and their children to live in the home could not be lost. The trust also included a spendthrift provision, which the Judge cited as evidence of the mother’s intent to prevent the husband and wife from disposing of legal title to the home to the detriment of themselves or their children. The trust also did not give the husband and wife any right to rent the property or collect income from it.
Judge Opperman concluded in stating that the trust had created an inalienable equitable life estate under Tennessee law. At that point, the creditors had already conceded that if that were the case, the debtors would have no obligation to turn over the property.