In re Rowand
| Decision Date | 30 July 2012 |
| Docket Number | Case No. 11-81717 |
| Parties | In re: BILL I. ROWAND and WENDY S. ROWAND, Debtors. |
| Court | U.S. Bankruptcy Court — Central District of Illinois |
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Thomas L. Perkins
The Debtors, Bill and Wendy Rowand (individually "BILL" and "WENDY," together the "DEBTORS"), filed a voluntary chapter 7 petition on June 30, 2011. Gary T. Rafool (TRUSTEE) is serving as the case trustee and has moved for an order designating him as beneficiary of two trusts in place of WENDY. The main issue to be decided is whether WENDY'S interest as a beneficiary under two trusts created by her parents is property of her bankruptcy estate.
WENDY'S father, John L. Greenwood, died in 2000, while her mother, Dorothy M. Greenwood, died October 27, 2011, 119 days after the bankruptcy filing. In addition to WENDY, John and Dorothy are survived by two other adult children, John T. Greenwood and Nancy A. Nilsson.
John L. and Dorothy M. Greenwood executed separate, but substantially reciprocal, trust agreements on April 10, 1998, each transferring certain scheduled property to themselves as trustee. Each trust is revocable, containing an identical provision enabling the settlor-trustee, but no one else, to amend or revoke the agreement in whole or in part. John's Trust, provides alternative dispositions of the trust assets, depending upon whether his wife outlives him. In the event of her survival, John's Trust calls for the creation of a separate trust for Dorothy's benefit designated as the "Marital Trust," funded by a portion of his trust assets. The balance of his trust estate is to be used to fund a separate trust designated as the "Family Trust," for the benefit of the three children. John's Trust provides that, upon his death, Dorothy M. Greenwood and the Central Trust and Savings Bank, Geneseo, Illinois, shall be his successor trustees, to serve jointly as co-trustees.
John's Trust provides that Dorothy is to receive the income from the Family Trust during her lifetime, but that the trustee of the Family Trust has the discretion to pay less than all of the income to Dorothy, and may pay the excess to any or all of the three children, or may add the undistributed excess income to the principal. The Family Trust trustee is also given the discretion to pay to Dorothy "such sums from principal as the trustee deems necessary or advisable from time to time for her health and maintenance in reasonable comfort, considering her income from all sources known to the trustee, but shall make no invasion of the Family Trust so long as any readily marketable assets remain in the Marital Trust."
John's Trust provides that upon Dorothy's death, subject to a power of appointment and to the payment of certain taxes, the remaining assets in the Marital Trust shall be added to the Family Trust. It further provides that upon Dorothy's death, the Family Trust is to be divided into equal shares, one for each child to be held as a separate trust, with respect to which it then provides:
SECTION 4: After division of the Family Trust into shares, the child may withdraw any part or all of the principal of his or her share at any time or times. Thetrustee shall make payment without question upon the child's written request. The right of withdrawal shall be a privilege which may be exercised only voluntarily and shall not include an involuntary exercise.
John's Trust also contains several general provisions that apply to each trust created under it, including the following:
The terms of Dorothy's Trust, which was also formed as a revocable trust, substantially mirror the terms of John's Trust.
The bankruptcy estate that is created upon commencement of a case is defined in 11 U.S.C. § 541. Whether a property interest of a debtor is "property of the estate" is a federal question to be decided as a matter of federal law. Matter of Yonikus, 996 F.2d 866, 869 (7th Cir. 1993). But state law determines whether and to what extent the debtor has any legal or equitable interest in property as of the commencement of the case. Id.; Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979).
The scope of the estate is extremely broad, capturing all legal or equitable interests of the debtor in property as of the commencement of the case. 11 U.S.C. § 541(a)(1). It also includes certain property interests that the debtor acquires or becomes entitled to acquire within 180 daysafter commencement of the case "by bequest, devise, or inheritance." 11 U.S.C. § 541 (a)(5)(A). This post-filing acquisition provision is, by definition, applicable only when the debtor does not have any interest in the property as of the commencement of the case, since the property would have already become part of the estate under section 541(a)(1). See In re Hall, 441 B.R. 680, 691 (10th Cir.BAP 2009); In re Holter, 401 B.R. 372, 376 (Bankr.W.D.Wis. 2009); In re Taylor, 2006 WL 1275400 (Bankr.C.D.Ill. 2006) (Fines, J.); In re Goldberg, 98 B.R. 353, 357-58 (Bankr.N.D.Ill. 1989).
Despite its breadth, section 541 contains several exclusions from property of the estate. A debtor's interest as a beneficiary of a spendthrift trust is excluded by section 541(c)(2), which provides as follows:
A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable in a case under this title.
This provision embodies a Congressional policy choice to exclude spendthrift trusts from a debtor's estate. Yonikus, 996 F.2d at 870.
Property of the estate encompasses conditional, future, speculative and equitable interests that the debtor may be entitled to. U.S. ex rel. Gebert v. Transport Administrative Services, 260 F.3d 909, 913 (8th Cir. 2001). A debtor's beneficial interest in a trust that does not contain an enforceable restriction on transfer is, generally, property of the estate, even if the debtor has no present rights and his future rights are conditional, since property of the estate includes contingent interests in future income or distributions. See In re Neuton, 922 F.2d 1379, 1382-83 (9th Cir. 1990) (collecting cases); In re Prochnow, 467 B.R. 656, 663 (C.D.Ill. 2012); Taylor, supra, (debtor's interest in inter vivos trust is property of the estate and the fact that she is not eligible to receive any distribution until one year after the death of her aunt does not defeat the bankruptcy estate's interestin the trust); In re Knight, 164 B.R. 372 (Bankr.S.D.Fla. 1994) (). Unless a valid spendthrift provision excludes the trust interest under section 541(c)(2), the entire interest and every right of the debtor under the trust becomes property of the estate. In re Potter, 228 B.R. 422, 424 (8th Cir.BAP 1999). Even if the trust agreement contains a spendthrift provision, it must be valid and enforceable at the time of the bankruptcy filing in order for the trust interest to be excluded. In re Hilgers, 371 B.R. 465, 468 (10th Cir.BAP 2007), aff'd, 279 Fed.Appx. 662 (10th Cir. 2008); In re Fetter, 354 B.R. 242, 245-46 (Bankr.C.D.Ill. 2006)(Gorman, J.).
The TRUSTEE questions whether the trusts are testamentary in character and, as such, not valid inter vivos trusts under Illinois law. Illinois courts have a long history with this issue, most often raised by heirs unhappy with the disposition of trust assets who challenge the validity of an inter vivos trust on the basis that it is a testamentary document that is invalid for failing to comply with the execution requirement applicable to wills. See First Nat. Bank of Joliet v. Hampson, 88 Ill.App.3d 1057, 410 N.E.2d 1109 (Ill.App. 3 Dist. 1980); Merchants Nat. Bank of Aurora v. Weinold, 12 Ill.App.2d 209, 138 N.E.2d 840 (Ill.App. 2 Dist. 1956). The Illinois Supreme Court issued a definitive opinion on the issue fifty-seven years ago in Farkas v. Williams, 5 Ill.2d 417, 125 N.E.2d 600 (1955), reversing the lower court's ruling that four inter vivos trust declarations not executed with the formalities of a will were invalid testamentary dispositions.
The four trusts were created by Albert Farkas for the purpose of transferring, upon his death, certain shares of stock to his employee, Richard Williams. After Farkas's death, the administratorsof his estate filed suit for a declaratory judgment that the trusts were testamentary and invalid. The trusts were self-settled in that Farkas was both the settlor and the trustee. Farkas reserved the absolute right to change the beneficiary and to revoke the trusts entirely, in which event ownership of the stock would revert to him in his individual capacity. During his lifetime, all dividends were to be paid to Farkas. He reserved the right to sell the stock and retain the proceeds, thus terminating the trust as to the stock sold. The trust declarations further provided that upon Farkas's death, the title to the stock and the right to any subsequent distributions "shall be vested absolutely in the beneficiary." The court identified and addressed two issues:
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