Bankruptcy For Elders: Minefield or Mother Lode?

I commend to you the money problems of the elderly as challenging and underserved.

The 70ish couple in my office came with their two adult daughters. Neither spouse appeared in good health.

The good news was that they had substantial equity in their home; the bad news was that the equity exceeded the California homestead for the elderly. And the real estate market is rising.

So, we were looking at filing two cases for the spouses, sequentially, so each could use the California homestead on their joint tenancy interest in the house. See Summers v. Hanf.

UPDATE: the treatment of California joint tenancy property was radically changed by the CA Supreme Court in Brace.

While that solved the “preserve the assets” problem, it created more challenges.

I had to do financial planning not just for their asset mix over the next 6 months, in light of §541, I had to plan for 10-12 months and I had to consider the possibility that one or the other spouse might pass away during that period.

Beyond the commencement of the case

Let’s review the issue:

The exception to the idea that the property of the estate is that which the debtor owns on the day of filing is found in §541(a)(5);

(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—

(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or

(C) as a beneficiary of a life insurance policy or of a death benefit plan.

On the exemption side, I don’t want to have to sort out whether one or the other spouse was the “dependent” of the other for §522(b)(11) purposes.

For these clients, I’m concerned about the property passing via joint tenancy to the estate of the spouse we plan to be the second to file. We would then have a wholly owned home where the exemption available to the survivor protects only a fraction of the total equity. That equity would effectively eliminate bankruptcy as a solution for the second spouse.

I’m also concerned about either spouse acquiring additional assets by reason of contractual beneficiary arrangement, like the beneficiary designations on IRA’s; pension plans; and, of course, life insurance.

Checklist

Here’s the list of assets I tried to flush out as possible sources of a death driven influx of cash.

Pension: is there a survivor benefit?
IRA: who is the beneficiary?
Life Insurance: could it go to a trust for the benefit of the survivor?

My bankruptcy goal is not to have to litigate whether the proceeds of any of these assets in the hands of the survivor is “necessary for support” as in (b)(10) and (11), or their state law equivalents.

From the perspective of the daughters’ generation, their goal has to be that their parents’ funds are property of their revocable trust (or other trust instrument). They need those funds to be available to them as successor trustee to care for their parents. That’s in addition to the probate avoidance feature of the trust.

Also, from the perspective of the next generation, the generous California homestead is available to protect equity in probate only for the benefit of the surviving spouse. At the death of the second spouse, there is no homestead to protect the accumulations of this couple for the benefit of their offspring.

Whereas, the bankruptcy cases will eliminate the existing debt. leaving, we hope, fewer creditors to pay at the passing of my clients.

Lots to do and issues to balance. But that’s what makes this practice challenging.

Image courtesy of Cheryl Colan and Flickr.