Archives for October 2011

Life Estates and Fraudulent Transfers

Seems I’ve been hearing a lot lately from people who have what they call a remainder interest subject to a life estate. If you search the archives of this blog there should still be an older item there where I called life estates an idea from hell. A life estate is created when someone transfers ownership of real estate – such as a cabin or farm – to some younger relatives, but keeps the right to live there and use the property for the rest of their life. The transfer is done by means of a deed. The person who keeps the right to use the property during their lifetime is said to have a life estate, and the people to whom the rest of the ownership was transferred are said to have a remainder interest. Typically the person with the life estate is a parent, and the people with the remainder are the children. Sometimes the parents will do it without telling their children.

The people who receive the remainder interest usually don’t think much of it because they can’t use the property now, but the law considers it an asset that they own right now. If you need a bankruptcy it can be a big problem. A remainder interest can be bought and sold, and there actually is a market for such things. There are investors out there who buy them. Most of the time the value of the remainder interest is enough so that it becomes impossible to file a Chapter 7. The will trustee claim the remainder interest as an asset for the creditors. It could make a Chapter 13 difficult too.

When I explain all this to somebody who is unfortunate enough to have one of these things, they often will say “well then I’ll deed it back and get rid of it.” My response to that idea is that it would be considered fraud to do that. There are both state and federal fraudulent transfer statutes that make it possible to undo the transfer when it is for the purpose of hiding an asset from creditors. When it is done in anticipation of a bankruptcy, it might be considered bankruptcy fraud which is actually a felony. Concealing an asset can be grounds for having a bankruptcy case dismissed without a discharge, even though the trustee might recover the asset from whoever it was transferred to first. So you can lose the asset, keep all your debts, and maybe be charged criminally besides. It’s hard to believe it can get that bad but it can.

Before filing a bankruptcy for someone, I often ask them to check with any elderly relatives who might have done one of these arrangements. I need to know for sure that no such property interest exists.

A couple of years ago the Minnesota legislature created a new alternative to the life estate. Now one can do what they call a transfer on death deed. The difference between the deed creating the life estate and the transfer on death deed is that the latter is revocable. It has no effect until the grantor actually dies, so what it really does is create a right to inherit a particular piece of real estate without putting the property through probate. For bankruptcy purposes this new idea scares me. I’m not sure if I trust it. I would want to be sure that it was tested in some court decisions before I rely on it.

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