SCOTUS Denies Writ of Certiorari to Minnesota Department of Revenue in Fielding
In a follow-up to our July 2019 Estate Planning & Probate Law FLASHPOINTS discussion on the North Carolina Department of Revenue v. Kimberley Rice Kaestner 1992 Family Trust, ___ U.S. ___, 204 L.Ed.2d 621, 139 S.Ct. 2213 (2019), decision, SCOTUS denied the Minnesota Department of Revenue’s petition for writ of certiorari of the Minnesota Supreme Court’s decision in Fielding v. Commissioner of Revenue, 916 N.W.2d 323 (Minn. 2018), shortly thereafter. In Fielding, the Minnesota Supreme Court found that the state’s grantor-domicile rule, as applied to trusts with “extremely tenuous” contacts with Minnesota, violated the Due Process Clause of the Fourteenth Amendment. 916 N.W.2d at332 – 333. The Minnesota statute defined “resident,” in relevant part, as “[a]n irrevocable trust, the grantor of which was domiciled in this state at the time the trust became irrevocable.” 916 N.W.2d at 327. However, in Fielding, the trustee was located out of state, all of the property was located outside of Minnesota, and the beneficiaries had minimal contact with Minnesota. Despite the narrow holding in Kaestner, it and Fielding can still provide guidance to planners when considering whether a trust will ultimately pay tax based on the location of the beneficiaries, trustees, and the grantor.
Tenancy by the Entirety Protection Does Not Extend To Surviving Spouse
In re Jaffe, 932 F.3d 602 (7th Cir. 2019) (see also this month’s Real Estate FLASHPOINTS), interprets §522(b)(3)(B) of the Bankruptcy Code, 11 U.S.C. §101, et seq., to determine the extent that Illinois law exempts the contingent future interests held by an owner in tenants by the entirety. As background, Laverne Williams sought the counsel of Scott Jaffe to file a medical malpractice lawsuit. 932 F.3d at 604. However, before Jaffe filed the complaint, the statute of limitations expired. Id. Thereafter, Williams sued for legal malpractice and obtained a default judgment that was recorded on Jaffe’s residence, which he owned with his wife as tenants by the entirety. Id.
More than a decade later, in 2015, Jaffe filed a Chapter 7 bankruptcy. 932 F.3d at 605. On his schedules of debt, Jaffe listed the debt owed to Williams as secured by his residence, which was owned as tenants by the entirety, and claimed an exemption under 735 ILCS 5/12-112. While Jaffe’s bankruptcy case was still pending, his wife died. 932 F.3d at 604. Jaffe filed a motion to avoid the judgment lien under §522(f) of the Bankruptcy Code, arguing that it impaired his exemption because the residence was owned as tenants by the entirety. 932 F.3d at 605.
The court first looked to whether a lien existed and to what interest it attached. Jaffe contended that the lien attached only to the tenancy interest, which is exempt, while Williams argued that her lien attached to Jaffe’s contingent future interest in the property. The court noted that the Illinois Supreme Court has not ruled whether a lien attaches to an individual’s tenancy by the entirety interest, therefore, the court interpreted Illinois law in the same manner as Illinois’ highest court would. 932 F.3d at 605, citing Liberty Mutual Fire Insurance Co. v. Statewide Insurance Co., 352 F.3d 1098, 1100 (7th Cir. 2003). Section 12-101 of the Illinois Code of Civil Procedure, 735 ILCS 5/1-101, et seq., creates judgment liens, which may attach to all real estate, which is defined broadly. Id. Section 1c of the Illinois Joint Tenancy Act, 765 ILCS 1005/0.01, et seq., outlines the future interests tenants by the entirety enjoy after the tenancy ends, including “(a) an interest as a tenant in common in the event of divorce, (b) an interest as a joint tenant in the event that another homestead is established, and (c) a survivorship interest in the entire property in the event of the other tenant’s death.” Id. Because the contingent future interests would fall in the broad definition of real estate, a judgment lien can attach to the aforementioned individual interests unless subject to an exception. 932 F.3d at 605 – 606, citing In re Tolson, 338 B.R. 359, 369 (Bankr. C.D.Ill. 2005). However, the only exception identified in §12-101 is the homestead exception under 735 5/12-901. The court points out that the Illinois legislature has exempted from judgment debtors’ interests in certain types of personal property or workers’ compensation awards. 932 F.3d at 606. Section 12-112 provides that judgment liens may attach to all real estate except for the “tenancy interest.” 735 ILCS 5/12-112. Since the Illinois legislature does not explicitly reference the contingent future interests outlined by §1c, the court found that Williams’ lien attached to Jaffe’s contingent future interest. Id.
Next, the court considered whether the interest Jaffe had in the property is exempt. The court provided background for tenancy by the entirety, which was created as a way for married couples to own land so that upon the death of one spouse, the property would belong to the surviving spouse. 932 F.3d at 606. Once the Married Women’s Property Act was enacted, the Illinois judiciary held that tenancy by the entirety was abolished. 932 F.3d at 606 – 607. Thereafter, the Illinois legislature codified tenancy by the entirety for real estate maintained by a married couple as their homestead. Id., citing 765 ILCS 1005/1c.
Under §541(a) of the Bankruptcy Code, a debtor’s bankruptcy estate is comprised of “all legal or equitable interests of the debtor in property as of the commencement of the case.” 932 F.3d at 607. Pursuant to §522(b)(3) of the Bankruptcy Code, debtors may exempt “[a]ny interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety or joint tenant to the extent that such interest as a tenant by the entirety or joint tenant is exempt from process under applicable nonbankruptcy law.” [Emphasis added.] Id. The court interprets this provision of the Bankruptcy Code as (1) providing an exemption for any interest in property as long as the debtor holds it as a tenant by the entirety and (2) such interest as a tenant by the entirety is exempt as long as it is available under Illinois law. 932 F.3d at 608. The court disagrees with Jaffe and the district court’s interpretation that “any interest in property” held as a tenant by the entirety must be exempt, but rather the qualifier “such interest as a tenant by the entirety” limits the exemption to the specific interest the debtor is trying to exempt; a future contingent interest in this case. 932 F.3d at 607 – 608.
Under Illinois law, a creditor cannot force the sale of the property owned as tenants by the entirety to collect a debt against only one owner. 932 F.3d at 609. However, Illinois law does not make all tenancy by the entirety interests exempt and does not provide an explicit exemption for contingent future interests. Id., citing In re Yotis, 518 B.R. 481, 489 – 490 (N.D.Ill. 2014) (“any future interest that may be held by either tenant alone, such as the contingent future interests, is not exempt at all”).
While tenancy by the entirety offers broad protection from the sale of the marital home by a judgment creditor of one spouse, it does not provide an exemption from judgment against the contingent future interests when tenancy by the entirety ends, by either divorce, death, or reestablishing a new homestead.
What’s Going on Next Door? Indiana Becomes The 18th State To Permit Self-Settled Asset Protection Trusts in the Form of “Legacy Trusts”
Effective July 1, 2019, §30-4-8-1, et seq., of the Indiana Code established the Indiana Legacy Trust law. The transfer to the legacy trust must (1) provide for at least one “qualified trustee,” (2) incorporate Indiana law to govern the validity, construction and administration of the trust, (3) be irrevocable, and (4) have a spendthrift clause. Ind. Code §30-4-8-4.
The transferor must sign a “qualified affidavit” that (1) the transferor has the right to transfer property to the trust, (2) the transfer will not cause the transferor to become insolvent, (3) the transferor does not intend to defraud creditors, (4) there are no pending or threatened court actions against the transferor, (5) the transferor is not involved in any pending administrative proceedings, (6) the transferor does not plan on filing for bankruptcy, and (7) the property transferred to the trust is not a result of unlawful activities. Ind. Code §30-4-8-5(a).
The “qualified trustee” must (1) maintain or arrange for the custody of the property in the trust, (2) maintain complete and accurate records of the trust, (3) prepare or arrange for the preparation of the legacy trust tax returns, and (4) materially participate in the administration of the trust. Ind. Code §30-4-8-6(b).
The only creditor claims that can reach the legacy trust assets, subject to a 2-year statute of limitations, are fraudulent transfer claims, child support obligations, and the division of property in a marital dissolution action if the transfer of assets to the trust occurred after the marriage or within 30 days before the date of the marriage, unless the spouse received written notice 3 days in advance of the transfer. Ind. Code §30-4-8-8(a). The fraudulent transfer claims must be brought under Indiana’s Uniform Fraudulent Transfer Act (Ind. Code §32-18-2-1, et seq.), and the requirements must be met by clear and convincing evidence. Id.
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