The following is a summary of a Minnesota bankruptcy case or a case relevant to Minnesota bankruptcy law.

Minnesota Bankruptcy Case:

In re Brown, BKY 08-35504 (Bankr. D. Minn. 2/11/10) (O’Brien, J.).

Case Summary:

Trust’s Spendthrift Provision Excludes Property from the Estate

The debtor, Brown, sought to compel the trustee to abandon an interest in trust distribution proceeds. The trustee sought a declaratory judgment that the interest was property of the estate. The court treated the motion and response as cross-motions for summary judgment. Brown’s cousin, Brissey, died in 2006. Brissey’s will directed that the residue of his estate be placed in a revocable trust. The trustee of the revocable trust was directed to divide the residue of the trust estate into equal shares to six named survivors, including Brown. The trust agreement contained a spendthrift clause. Brown filed a chapter 7 petition in 2008, and scheduled an interest in the revocable trust, which he valued at $500 and claimed exempt under 11 U.S.C. § 522(d)(5). In March of 2009, the trustee learned that Brown’s share in the trust was approximately $35,000. The trustee argued that the funds were property of the bankruptcy estate because Brown’s interest in the trust matured pre-petition (upon Brissey’s death) through the testamentary bequest to the trust of the residue of the probate estate.

Citing § 541(a)(5)(A) and In re Katusky, 372 B.R. 910, 912 (Bankr. D. Minn. 2007), the court concluded that on the date Brown filed his petition, he did not have an interest in Brissey’s estate; he had a beneficial interest in a trust with a valid spendthrift provision. Because the spendthrift provision was a “restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law,” the distribution was excluded from the estate and the estate had no interest in the trust or in proceeds received by Brown from the trust. The court granted the debtor’s motion to compel abandonment, denied the trustee’s motion for summary judgment, and declared that Brown is entitled to judgment that the estate has no interest in the trust or its proceeds.

Credit: The preceding was a summary of a case relevant to Minnesota bankruptcy law. The case summary was prepared by the U.S. Bankruptcy Court through Judge Robert J. Kressel & attorney Faye Knowles.