Remember yesterday when I discussed talking to your parents about their debt? I think it’s important for families to start talking. I also think it may be important for parents to speak to their adult children about debt, especially when you hear what happened to a client of mine.
My client did not know that his parents had gone to an estate planning attorney. The parents created a life estate in their home, leaving a remainder interest to their adult children. The life estate gives the parents the right to live in their home until they die, and then upon their death, the home will pass to the children without having to go through probate. The children have what is called a remainder interest. They do not have the home, but they have a future interest in the home.
This nifty estate planning tool created havoc when one of the parents’ children (my client) filed for chapter 7 bankruptcy protection. In chapter 7, the unexempt assets of the debtor are sold to pay creditors. The debtor did not list the asset because he did not know he had an interest in his parent’s home (neither he nor his then attorney asked). Since it was not known, it was not listed, and since it was not listed, the debtor did not claim it as exempt from liquidation.
The chapter 7 trustee learned about the interest presumably by scouring public records. When the trustee got wind of the future interest, he asked the court for permission to sell the interest to the highest bidder. The Bankruptcy Code allows the trustee too sell the debtor’s interest in the property: something the parents did not plan for when they were putting together their estate plan and trying to preserve their home for all of their children.
I will relay how this saga ended another time. For now, I will say that it ended up costing the debtor a lot of money, and causing the entire family anxiety that they did not need. If the debtor had told his parents that he was in debt and needed to file bankruptcy, there still would have been issues to resolve. However, both the debtor and his parents could have been proactive instead of being reactive. Rather than reacting to the trustee’s attempts to seek an order of sale, they could have taken some time to think through other options before starting the bankruptcy process. These folks never got to that point because no one in the family really talked to each other about what was going on. The parents did not mention the estate plan, and the debtor did not mention the bankruptcy, or the reasons why bankruptcy protection was needed.
It’s hard for adult parents to admit to their kids that they have financial problems, and for very different reasons, it’s hard for adult kids to have to admit it to their parents. But actions have consequences. And as this debtor, his siblings and his elderly parents learned, not talking about it can also have unintended consequences. Be proactive, and don’t let this happen to you, your kids, or your parents. Start talking.
- Mass. Bankruptcy Judge Rules Trust Property Is Chapter 7 Estate Property
- Talking to your Kids
- When the Nest is not Empty: Some Food for Thought for Parents Struggling with Debt
- When Parents are in Debt
- 10th Circuit: Legal Interest Acquired Post-petition is Property of the Estate