Husband and Wife bought their Kansas home in 2004, and the following year they deeded it to their self-settled living trust.
The term "self-settled" means that Husband and Wife funded a trust for their own benefit, i.e., they were both the "settlors" who created the trust and the beneficiaries of the trust.
In 2007, the Trust deed the homestead back to Husband and Wife in their individual capacities so that they could re-finance a mortgage. The next day, apparently having secured the re-financing, Husband and Wife deed it back to the Trust.
Thereafter, the economy collapsed and Husband and Wife fell on hard times. In 2011, the Trust deeded the property to Husband alone, so that he could secure a reverse mortgage in the form of a home equity conversion mortgage ("HECM") secured by life insurance, to give him cash to pay off previous debts secured by the home.
Two months later, Husband filed for bankruptcy, and listed the home as his exempt property. The Bankruptcy Trustee objected to the exemption under section 522(p) of the Bankruptcy Code, which provides:
(p)
(1) Except as provided in paragraph (2) of this subsection and sections 544 and 548, as a result of electing under subsection (b)(3)(A) to exempt property under State or local law, a debtor may not exempt any amount of interest that was acquired by the debtor during the 1215-day period preceding the date of the filing of the petition that exceeds in the aggregate $125,000 in value in—
(A) real or personal property that the debtor or a dependent of the debtor uses as a residence;
* * *
(D) real or personal property that the debtor or dependent of the debtor claims as a homestead.
The Trustee argued that when the Trust deeded the property to Husband, this amounted to newly-acquired property by Husband and thus within the 1215-day period. But the Court didn't see it that way:
The Tenth Circuit Bankruptcy Appellate Panel has held that the word "interest" in sec. 522(p) means "equity." Here, the trustee failed to prove that [Husband] "acquired" any additional amount of interest or equity in his homestead within the 1,215 day period that he did not already have before he obtained legal title. Nor did the trustee prove that the amount of interest in the homestead increased in value by virtue of the HECM transaction. Before [Husband] received the deed from the Trust, his equitable interest in the homestead amounted to the remainder of its value after deduction of the $377,389 due on the three existing mortgages. After he received the deed, he encumbered the homestead with the HECM, and paid off the three pre-existing mortgages in the same amount; the amount of his equitable interest was the same as it was before [Husband] obtained legal title to the homestead. He did not acquire any additional value or equity as a result of this transaction. All [Husband] did was receive legal title to property in which he had claimed an exempt equitable interest for many years. There was no added equity or "amount of interest" acquired by [Husband] to be "capped" by sec. 522(p).
In other words, because Husband held a beneficial interest in the Trust which held the property, Husband indirectly held a beneficial interest in the home, and thus when the Trust deeded the property to him there was no effective change of beneficial ownership.
But this was certainly a close-call for Husband, as the Court could easily have gone the other way and strictly construed section 522(p) to mean title. What this case illustrates is the dangers inherent in futzing around with transfers of homestead, and how the homestead protection might by lost through creative attempts as financing.
Be careful out there. The law regarding 522(p) is still very unsettled, and it is difficult to predict how it will shake out.
In re Peake, ___ B.R. ____, 2012 WL 4903054 (Bkrtcy.D.Kan., Oct. 5, 2012). Full Opinion at http://goo.gl/83Eof
This article at http://onforb.es/SewyjT and http://goo.gl/YGqbM
