A US district court in Illinois held Jan. 13, 2016 that a Chapter 13 debtor is entitled to an exemption for her beneficial interest in a home owned by her non-debtor husband’s living trust.
Judge Bucklo of the U.S. District Court for the Northern District of Illinois affirmed the judgment of the bankruptcy court, concluding that the creditor’s objection to the debtor’s claimed exemption was overruled.
Creditor/appellant Leonard Loventhal failed to carry his burden of showing that debtor Zisl Taub Edelson and her husband Claude Edelson severed their tenants by the entirety exemption with respect to their residence when they conveyed it to Claude’s living trust, the court said.
“Tenants by the entireties” is a concurrent ownership that exists between married persons who have the right of survivorship, the court said. Unilateral transfer of ownership of a spouse’s interest in entireties property typically isn’t possible without severance of the joint tenancy, according to the court, and severance usually requires the consent of both spouses or the ending of the marriage in divorce.
Bankruptcy Code Section 522(b)(3)(B) allows a debtor to exempt from her estate “any interest in property in which the debtor had, immediately before the commencement of the case, an interest as a tenant by the entirety … to the extent that such interest … is exempt from process under applicable nonbankruptcy law.”
In 2001, Zisl and her husband purchased a home in Illinois and owned it as tenants by the entireties. In 2004, they conveyed the residence to Claude’s living trust, and the warranty deed stated that “the beneficial interest of said trust [is] held by Claude J. Edelson and Zisl Taub Edelson, husband and wife, as tenan[ts] by the entirety.”
Subsequently, Zisl filed for Chapter 13 protection, which allows individuals receiving regular income to obtain debt relief while retaining their property. She listed Loventhal as an unsecured creditor to whom she owed a judgment debt of $66,000.
Zisl also claimed the tenants by the entirety exemption of the residence.
Loventhal objected, arguing that the debtor severed her exemption when they conveyed the residence to Claude’s living trust because the trust agreement gave Claude unilateral powers over the property that aren’t consistent with a tenants by the entireties arrangement.
The bankruptcy court overruled Loventhal’s objection. According to the court, Loventhal hadn’t shown that “the transfer into trust was inconsistent with a tenancy by the entirety under Illinois law.”
Loventhal appealed to the district court, arguing that the debtor can’t shield the residence from her creditors under the tenancy by entireties exemption. According to Loventhal, although Zisl retains survivorship rights, Claude’s trust declarations rather than the tenants by the entireties exemption law controls the residence’s disposition
The district court rejected Loventhal’s argument as exalting “form over substance.” The survivorship clause in Claude’s trust declaration is a statement of the law rather than an attempt to displace it, the court said.
The court also interpreted the trust’s declaration to mean that under Claude’s general powers, he can’t take unilateral actions with respect to the residence.
As a result, the court found that Loventhal didn’t carry his burden of showing that the Edelsons severed their tenants by the entireties exemption with respect to the residence when they conveyed it to Claude’s living trust.
Should you have questions about exemptions, your own bankruptcy case or need assistance, please call Winslow & McCurry, PLLC at (804) 423-1382.
