Creditor Death of Debtor by nwg11134


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                                  SALLY C. MERRELL
                                QUARLES & BRADY LLP
                            1999 MIDWINTER CONVENTION
                                   JANUARY 29, 1999

                                    REVOCABLE TRUST

    Can a creditor assert a claim against a funded revocable trust?

    I.       While the settlor is alive, yes. Wis. Stats. ' 701.06(6).

    II.      After the death of the settlor, Wisconsin has no direct authority.

             A.     Early cases from other jurisdictions said Ano.@ Jones v. Clifton, 101
                    U.S. 225(1879), Schofield v. Cleveland Trust Co., 21 N.E.2d 119
                    (Ohio 1939), Greenwich Trust Co. V. Tipon, 27 A.2d 166 (Conn

             B.     More recent cases say Ayes.@

                    1.     State Street Bank and Trust Co. v. Reiser, 389 N.E.2d 768
                           (Mass App 1979) relied on property law to conclude that
                           creditors have Aan equitable right@ to reach the property.
                           Lawsuit by creditor was filed directly against trustee of
                           revocable trust.

                    2.     Johnson v. Commercial Bank, 588 P.2d 1096 (OR 1978)
                           ruled that transfer by the settlor to the trust is Avoid as against
                           his existing or subsequent creditors.@ The will of the
                           decedent nominated the bank which was also trustee of the
                           revocable trust as personal representative. Creditor, a
                           practical nurse, had provided in-home physical therapy and
                           nursing care to husband transferor and his wife prior to their
                           deaths. She was appointed personal representative of the
                           estates of both husband and wife. Neither the bank nor the
                           beneficiaries contested her claim in the estate and the probate
                           court approved the claim. Oregon, unlike Wisconsin, has a
                           statue that provides that Aproperty transferred by the decedent
                           with intent to defraud his creditors or transferred by any
                           means which is in law void or voidable as against his
                           creditors@ is liable for claims and that the right to recover that
                           property belongs to the personal representative Awho shall
                           take necessary steps to recover.@ OR. '114.435

                    3.     A helpful summary of the law can be found at Kruse,
                           ARevocable Trust: Creditors= Rights after Settlor=s/Debtor=s
                           Death@ Probate and Property, November/December 1993.

             C.     Wisconsin has enacted the Uniform Fraudulent Transfer Act
                    (AUFTA@). Selected portions of Wisconsin Statutes Chapter 242 are
                    attached as Appendix 1.

                    1.     The definition of Atransfer@ in Wis. Stats. ' 242.01(12)
                           includes Aevery mode, direct or indirect, absolute or
                           conditional, voluntary or involuntary@ of transferring an asset.
                            For example, would the loss of the power to revoke upon
                           death be a transfer?

                    2.     When does the transfer take place? If death is the transfer, all
                           creditors qualify as Apresent creditors@ and can rely on Wis.
                           Stats. ' 242.05(1). The creditor merely has to establish that
                           the transfer was made Awithout receiving a reasonably
                           equivalent value in exchange@ and that the debtor Awas
                           insolvent at that time, or the debtor became insolvent as a
                           result of the transfer or obligation.@ Wis. Stats. ' 242.05(1).

                    3.     If trust funding is the transfer, creditor may be a Afuture
                           creditor@ and must rely on Wis. Stats. ' 242 (1)(a) (actual
                           fraud) or ' 242(1)(b) (constructive fraud).

                    4.     UFTA includes a one or four year statute of limitations
                           depending on which section applies. Wis. Stats. ' 242.09,
                           893.425. Four year statute applies to ' 242.05(1) claims.

    III.     Does it make a difference if there is a probate estate?

             A.   Wis. Stats. ' 859.02(3) provides that the failure of a claimant Atimely
                  to file a claim against a decedent=s estate does not bar the claimant
                  from satisfying the claim from property other than the decedent=s

             B.   If the revocable trust is being pursued under a fraudulent conveyance
                  theory, courts have been divided as to whether or not a personal
                  representative can pursue the claim. Confusion arises from the fact
                  that the decedent, while alive, cannot void his or her own
                  transactions under the fraudulent transfer statutes. See Jenkins,
                  ARights of Unsecured Estate Creditors Under the Uniform
                  Fraudulent Transfer Act in Property Transferred Prior to Death@,
                  Oklahoma Law Review, Summer 1992.

             C.   Read the trust instrument.

                  1.     Revocable trust agreements frequently direct trustee to make
                         funds available on demand of personal representative.

                  2.     Is this a good idea?

                         a.     Does this provision make otherwise unavailable assets
                                available to probate creditors?

                         b.     Absence of the provision could make administration of
                                estate with partially funded revocable trust

                         c.     Tort creditors are not barred by probate claim statute.
                                Wis. Stats. ' 859.02(2)(a). Unhappy family members
                                will increasingly recast themselves as tort creditors.
                                See AAt the Front of Probate Litigation: Intentional
                                Interference with the Right to Inherit.@ Probate and
                                Property, November/December, 1998. Doughty v.
                                Morris, 871 P.2d 380 (NM App 1994) (Tort action for
                                intentional interference with an inheritance

                          d.     Consider whether revocable trust is intended to be a
                                 Adesignated beneficiary@ of a qualified plan or IRA.
                                 Prop. Treas. Reg. ' 1.401(a)(9)-1 Q&A D-2, D-5. IRS
                                 has hinted that, to the extent tax-qualified proceeds
                                 payable to revocable trust are available to pay death
                                 taxes and expenses, revocable trust is not a Adesignated
                                 beneficiary.@ See PLR 9820021.

             D.    Is there any right of contribution from other property? Is the priority
                   of creditors first come, first paid? Who gets paid to figure this out?
                   Administration expenses get priority in a probate. Wis. Stats. '
                   859.25 (1)(a). This provision does not apply to revocable trusts.

    IV.      A trustee of revocable trust who Ahas a duty or power to pay@ the debts of a
             decedent can now publish notice voluntarily. Wis. Stats. ' 701.065
             (included as part of the Uniform Probate Code Legislation). This statute,
             like the probate claim statute, includes one year statute of limitations for
             claims Anot barred@ by date published in notice. Wis. Stats. ' 701.065(3).
             This statute also states that failure to timely file a claim does not limit
             creditor from pursuing other assets. Wis. Stats. ' 701.065(4).

             A.    Should a trustee publish?

             B.    Main risk of publishing is admission that the trustee does have the
                   Apower or duty@ to pay the debts.

                            OTHER NON-PROBATE ASSETS

           Property law or fraudulent conveyance statute could be used to pursue
    assets passing by non-probate transfers other than revocable trusts. Availability of
    these assets to creditors depends on a potpourri of federal and state law.

    I.       Qualified Plans, IRAs and Other Deferred Compensation Arrangements

             A.    Patterson v. Shumate, 504 U.S. 753 (1992), reh. den., 505 U.S. 1239
                   (1992), held that qualified pension plans subject to Part 2 of Title 1
                   of ERISA are not available to creditors of the debtor beneficial
                   owner of the ERISA plan.
             B.    IRAs are not governed by ERISA. Wis. Stats. ' 815.18 sets forth the
                   property exempt from execution by debtors. Wis. Stats. '
                   815.18(3)(j) provides that any retirement pension, individual
                   retirement account, or Asimilar plan or contract providing benefits by
                   reason of age, illness, disability, death, or length of service and
                   payments made to the debtor therefrom@ are exempt from execution.
                    In order to qualify as an exempt asset, the plan must have been
                   created by the employer for employees or comply Awith the
                   provisions of the internal revenue code.@ No Wisconsin cases
                   discuss impact of this exemption once the plan participant has died.

             C.    Exemptions limited to assets necessary for support where assets are
                   Apayable under or traceable to an owner-dominated plan@ and the
                   debtor was the Aowner-employee@. Wis. Stats. ' 815.18(3)(j)(4).

             D.    In re Bruski, 1998 WL 749064(Bankr. W.D. Wisconsin, 1998) held
                   that a Aflexible premium retirement annuity@ qualifies for the
                   exemption from execution as the annuity Acomplies@ with I.R.C. '

             E.    Exemption from execution can by denied if court, in its discretion,
                   determines debtor Aconcealed or transferred assets with the intention
                   of defrauding creditors.@ Wis. Stats. ' 815.18(10).

    II.      Life Insurance

             A.    Wis. Stats. ' 815.18(3)(f) provides an exemption for a Aunmatured
                   life insurance contract@ owned by the debtor and insuring the debtor
                   and certain other individuals and the debtor=s aggregate interest, not
                   to exceed $4,000 in value, in the Aaccrued dividends, interest or loan
                   value of all unmatured life insurance contracts@ owned by the debtor
                   and insuring the debtor and certain individuals.

             B.    Wis. Stats. '815.18(3)(i)1.a provides an exemption for payments
                   Aunder@ life insurance contracts insuring the life of an individual of
                   whom the debtor was a dependent to the extent necessary for the
                   support of the debtor and the debtor=s dependents. Note that this
                   exemption does not apply to proceeds of life insurance on the life of
                   the debtor. Exemptions, as necessary for support, also exist for
                   wrongful death payments, person injury payments and payment for
                   loss of future earnings. Wis. Stats. ' 815.18(3)(i)1.b-d.

             C.    Wisconsin law previously provided an exemption from executions
                   for life insurance proceeds payable to beneficiaries except in cases
                   of transfer with intent to defraud. Wis. Stats. ' 815.19, 1987-1988
                   Wisconsin Statutes.

             D.    Do life insurance policies Acomply with the provisions of the internal
                   revenue code?@ See Wis. Stats. ' 815.18(3)(j) and In re Bruski as
                   cited above.

    III.     Joint Property, Bank Accounts, and Other Non-Probate Transfers.

             A.    On death of joint tenant, his or her interest in joint tenancy should
                   pass to surviving joint tenant free of creditor claims of the dead joint
                   tenant. Northern State Bank v. Toal, 69 Wis.2d 50, 56 (1975).

             B.    Multi-party bank accounts are governed by Wis. Stats. ' 705.07(2).
                   A debtor shall be deemed to have made a transfer the time of
                   the debtor party=s death as to sums not previously withdrawn... In
                   the case of a transfer by reason of the death of the debtor party, the
                   sole ground for determining any such transfer to be fraudulent shall
                   be whether the debtor party=s estate subject to administration is
                   insolvent under ' 242.02.@

             C.    Wis. Stats. ' 705.20-705.30 allow for registration of securities in
                   TOD or POD form. These sections do not Alimit the right of
                   creditors of security owners against beneficiaries and other
                   transferees under other laws of this state.@ Wis. Stats. ' 705.29(2),
                   also ' 705.20(2).

    IV.      Special rules apply when decedent is survived by spouse.

             A.    Wis. Stats. ' 859.18(4)(a) provides that survivorship marital property
                   joint tenancy, deferred employment benefits, and life insurance
                   proceeds not payable to estate are not available to satisfy the
                  obligations of the decedent if the decedent spouse was the only
                  obligated spouse or the only incurring spouse. If surviving spouse is
                  the only obligated spouse, decedent=s interest in joint tenancy
                  deferred employment benefits and life insurance on decedent are not
                  available, Wis. Stats. ' 859.18(4)(b).

             B.   Assets of the surviving spouses that would have been available to the
                  creditor had the marriage continued remain available to the creditor,
                  except as provided in Wis. Stats. ' 859.18(3) to (5). Wis. Stats. '
                  859.18(2), Marital Property Law in Wisconsin, Paragraph 12.93.


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