Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: October 16, 2008
Appeal from the United States Bankruptcy Court for the Central District of California. Honorable Erithe A. Smith, Bankruptcy Judge, Presiding. Bk. No. SA-06-10725-ES. Adv. No. SA-07-01143-ES.
Before: HOLLOWELL, MONTALI and DUNN, Bankruptcy Judges.
MEMORANDUM
The Chapter 7 bankruptcy Trustee, Weneta M.A. Kosmala (" Trustee"), asserts that Dennis J. Cook (" Debtor") acquired an interest in trust property as a bequest, devise or inheritance because the bulk of the trust assets were transferred into the trust by the Debtor's mother's will. Appellees disagree, arguing the Debtor's interest in trust property merely vested at the time of the Debtor's mother's death and is excluded from property of the estate. The bankruptcy court found for the Appellees. We AFFIRM.
I. FACTS
The Debtor's parents established the Donald D. Cook and Nancy A. Cook Revocable Trust Dated October 23, 1997 (the " Trust"), deeded four parcels of real property (the " Properties") to the Trust, and executed their wills the same day in October, 1997. Each parent's will is identical in terms; all property and assets of their estate were given to the Trust (the " Will"). No other real property was ever transferred to the Trust. At some point, the Properties were taken from the Trust for refinancing purposes and the Debtor's parents did not re-deed the Properties to the Trust.
The Will states, in part: " I give all my property to the trustee of the Donald D. Cook and Nancy A. Cook Revocable Trust, created under the declaration of trust executed on the same date as, but immediately before, the execution of this will . . . ." The Will further states, " If the Donald D. Cook and Nancy A. Cook Revocable Trust has been revoked, terminated, or declared invalid for any reason, I give the residue of my estate to the executor of this will, as trustee, who shall hold, administer, and distribute the property under a testamentary trust, the terms of which shall be identical to the terms of the Donald D. Cook and Nancy A. Cook Revocable Trust that are in effect on the date of execution of this will." See Section 2.1 and 3.1.
The Debtor's parents were the settlors, co-trustees and beneficiaries of the Trust. The Debtor and his three siblings are beneficiaries of the Trust, in equal shares, upon the death of the parents.
The Debtor's father died on May 7, 2006, leaving Debtor's mother as the surviving beneficiary of the Trust. The Debtor's brother, Donald D. Cook, Jr. (the " Successor Trustee"), succeeded as the trustee due to incapacity of the mother. The Debtor filed for Chapter 7 bankruptcy relief on May 18, 2006. The Debtor's mother died October 10, 2006, within 180 days of the filing.
Unless otherwise indicated, all " Code, " chapter and section references are to the Bankruptcy Code, 11 U.S.C. § § 101 - 1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
The Trust contained three checking accounts (with over $110,000 in funds) at the time the Debtor filed for bankruptcy. At the time of the death of Debtor's mother, the Properties were still not in the Trust.
The Trustee, in her brief and her summary judgment motion, asserts both that " no real property assets were held in the name of the Trust" and, that " no assets were held in the name of the Trust" at the time of the death of Debtor's parents. This latter assertion is contradicted by Appellee's declaration that three checking accounts were held in the Trust as of the date of the Debtor's bankruptcy filing. It is unclear what assets other than the Properties were conveyed to the Trust by the pour over provision of the Debtor's mother's Will.
The Debtor did not list his interest in the Trust on his schedules. The bankruptcy case was closed as a no-asset case on January 31, 2007. Subsequently, the Trustee became aware of the Trust and sought an order to re-open the bankruptcy case. The Debtor's bankruptcy case was re-opened on May 21, 2007. After the case was re-opened, the Debtor amended his schedules to list his interest in the Trust as a contingent remainder interest which he asserted was not property of the estate because of the spendthrift provisions of the Trust.
Because the Properties were not in the Trust at the time of the Debtor's mother's death and were conveyed to the Trust only by the terms of the Will, the Successor Trustee sought an order from the Superior Court of California affirming that the Properties were an asset of the Trust. The order was granted on February 1, 2007.
On May 30, 2007, the Trustee filed a five count complaint (" Complaint") for (1) a determination that the Properties in the Trust were property of the estate, (2) turnover of the Properties in the Trust pursuant to 11 U.S.C. § 542, (3) the avoidance and recovery of the Properties pursuant to 11 U.S.C. § 544, (4) the recovery of 25% of the Debtor's beneficial interest in the Trust and (5) attorneys' fees. In counts one, two, and three, the Trustee was seeking recovery of the Properties in the trust. Only in the fourth count of the Complaint was the Trustee seeking recovery of any part of the Debtor's interest in the Trust.
The Successor Trustee and the Debtor filed motions to dismiss and/or for summary judgment. The Trustee also filed a motion for summary judgment. In her motion, the Trustee altered her argument from seeking the Properties to seeking recovery of the Debtor's interest in the Trust (what she refers to as the " Testamentary Interest").
The matter was heard by the bankruptcy court which entered an order granting summary judgment to the Successor Trustee and the Debtor on counts one, two, and three regarding the Debtor's interest in the Properties in the Trust. The bankruptcy court also granted summary judgment against the Trustee on count five which was her request for attorneys' fees. The Trustee filed a timely notice of appeal. The Trustee does not appeal the bankruptcy court's dismissal without prejudice of the fourth count relating to the Debtor's interest in the Trust.
II. ISSUE
Is the Debtor's interest in the Trust property of the bankruptcy estate?
III. JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(B). We have jurisdiction to hear appeals from final judgments, orders, and decrees under 28 U.S.C. § 158. This is a final judgment because it " ends the litigation on the merits." Slimick v. Silva (In re Slimick), 928 F.2d 304, 307 (9th Cir. 1990).
IV. STANDARDS OF REVIEW
We review conclusions of law and issues of statutory interpretation de novo. Irwin Mortgage Co. v. Tippett (In re Tippett), 338 B.R. 82, 85 (9th Cir. BAP 2006).
V. DISCUSSION
The primary issue in this case is whether the Debtor acquired his interest in the Trust through bequest, devise, or inheritance within 180 days of filing for bankruptcy. The Trustee puts great weight on the fact that the Trust held no real property until the Properties were transferred into the Trust by the Debtor's mother's Will. Because the Trust received the Properties through the pour over provisions of the Will, and because the Trust's provisions require a distribution of Trust assets upon the death of the last settlor, the Trustee argues the Trust is merely a conduit for the devise of the Properties and that the Debtor's interest in the Properties is property of the bankruptcy estate under the plain language of § 541(a)(5).
Our analysis is not affected by whether or not title to the Properties was in the Trust or remained with the Debtor's mother on the date the Debtor filed for bankruptcy.
The filing of a bankruptcy petition creates a bankruptcy estate comprised of " all legal or equitable interests of the debtor in property as of the commencement of the case." § 541 (a)(1). Property of the bankruptcy estate is further defined in Section 541(a)(5) to include " any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date-- by bequest, devise, or inheritance." § 541(a)(5)(A) (emphasis added).
A. State law defines the Debtor's interest in the Trust.
Section 541(a)(1) defines what interests of a debtor are included in the estate; however, the existence and scope of a debtor's property interest is determined by state law. State v. Farmers Mkts., Inc. (In re Farmers Mkts, Inc.), 792 F.2d 1400, 1402 (9th Cir. 1986); Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
The Trustee argues that Lyeth v. Hoey, 305 U.S. 188, 59 S.Ct. 155, 83 L.Ed. 119, 1938-2 C.B. 208 (1938), and the U.S. Constitution's uniformity requirement of the Bankruptcy Code mandate a definition of bequest, devise or inheritance to include all property transfers upon death by will, trust, or otherwise in order to bring nationwide uniformity to § 541(a)(5)(A).
The Lyeth case addresses the definition of income for tax purposes when a person receives more from a will contest settlement agreement than by the terms of the will itself. The only issue was whether an " inheritance" should be expanded to include settlement proceeds derived from challenging the inheritance. Lyeth is not factually similar to this case and its holding interpreting provisions of the tax code does not provide persuasive authority to adopt, in this case, an expansive federal definition of inheritance to include, as the Trustee argues, all transfers of property upon the death of another.
Butner addresses the argument for a uniform federal approach in situations involving property rights in bankruptcy and resolves the issue by holding that " unless some federal interest requires a different result, there is no reason why [property interests] should be analyzed differently [than under state law] simply because an interested party is involved in a bankruptcy proceeding." 440 U.S. at 55. We find no such federal interest here. See id. at 54 (" Congress has generally left the determination of property rights in the assets of a bankrupt's estate to state law."); Magill v. Newman (Matter of Newman), 903 F.2d 1150, 1153 (7th Cir. 1990) (" The federal courts must use state law to determine what constitutes a bequest, devise, or inheritance under [§ 541(a)(5)(A)].").
Although using state law determinations might lead to different results in different states, this does not affect the constitutionality of the Bankruptcy Code. Stellwagen v. Clum, 245 U.S. 605, 613, 38 S.Ct. 215, 62 L.Ed. 507 (1918); Drummond v. Urban (In re Urban), 375 B.R. 882, 891-92 (9th Cir. BAP 2007). Therefore, consistent with California state law, we define a bequest as a gift (transfer) by will of personal property; a devise as a testamentary disposition of land or realty or a gift of real property by the last will and testament of the donor; and, inheritance as property which descends to an heir on the intestate death of another. Birdsell v. Coumbe (In re Coumbe), 304 B.R. 378, 383-84 (9th Cir. BAP 2003) (citing BLACK'S LAW DICTIONARY 160, 452, and 782 (6th ed. 1990)); Estate of Cochran, 30 Cal.App.3d 892, 898 n.2, 106 Cal.Rptr. 700 (1973); CAL. PROB. CODE § 32.
B. Under California law, the Trust is an inter vivos trust, not a testamentary trust.
Whether post-petition trust distributions to a debtorbeneficiary qualify for inclusion in the bankruptcy estate depends on the nature of the trust at issue. In re Schauer, 246 B.R. 384 (Bankr. D. N.D. 2000); Matter of Newman, 903 F.2d at 1152; Heidkamp v. Galliher (In re Hunger), 272 B.R. 792, 795 (Bankr. M.D. Fla. 2002). Trusts may be created by will or " inter vivos" (between living persons). RESTATEMENT (THIRD) OF TRUSTS § 10 (2003); 60 CAL. JUR.3D TRUSTS § 2 (2008). The Trust in this case was created and initially funded by Debtor's parents during their lifetimes. The Will did not create the Trust, it merely served to transfer the Properties to the existing Trust through a " pour over" disposition. Therefore, the Trust itself is an inter vivos trust.
It reads: § 10. Methods of Creating a Trust. " Except as prevented by the doctrine of merger, a trust may be created by: (a) a transfer by the will of a property owner to another person as trustee for one or more persons; or (b) a transfer inter vivos by a property owner to another person as trustee for one or more persons . . . ."
Inter vivos trusts are considered to be non-testamentary even though the terms of the trust may provide for the transfer of the trust's assets to its beneficiaries upon the last settlor's death. RESTATEMENT (SECOND) OF TRUSTS § 57 (1959). " Where an interest in the trust property is created in a beneficiary other than the settlor, the disposition is not testamentary" merely because the interest of the beneficiary does not take effect before the death of the settlor or because the settlor reserves the power to revoke or modify the trust. Id .; Spencer v. Zimmermann (In re Spencer), 306 B.R. 328, 334 (Bankr. C.D. Cal. 2004). There is no requirement that an inter vivos trust, as the Trustee asserts (without the support of authority), provide the beneficiary monthly income payments or be outside the control of the settlor.
In contrast, if the trust is created after the death of the settlor by the terms of a will, then the disposition of the trust assets is considered to be testamentary. See RESTATEMENT (SECOND) OF TRUSTS § 56 cmt. a (1959); York v. Kragness (In re Kragness), 58 B.R. 939 (Bankr. D. Or. 1986). Distributions from testamentary trusts received by a debtor-beneficiary within 180 days of filing the bankruptcy petition are property of the estate. See In re Hunger, 272 B.R. at 795; In re Kragness, 58 B.R. at 944.
The Trustee argues that the distinction between inter vivos and testamentary trusts is artificial and lumps all trusts which involve a distribution of property on the death of the settlors into a category of " estate planning trusts, " which provide debtors with " testamentary interests" that become property of the estate if received within 180 days of filing a bankruptcy petition.
The cases cited to by the Trustee to support her argument that Trust assets belong in estate property involve testamentary trusts-trusts created by wills-and are distinguishable from the facts of this case.
California courts, however, recognize the distinction between inter vivos and testamentary trusts; under California law distributions from an inter vivos trust do not constitute testamentary dispositions. Bucholtz v. Belshe, 114 F.3d 923, 925-926 (9th Cir. 1997); In re Spencer, 306 B.R. at 334-336; Neuton v. Danning (In re Neuton), 922 F.2d 1379, 1384 fn.6 (9th Cir. 1990).
C. The devise of the Properties to the Trust does not make the Trust testamentary.
The Trustee asserts the Trust is testamentary because the Properties came into the Trust by devise from the Will and then were " immediately" distributable to the beneficiaries. However, the character of the Trust is not altered merely because the Properties were transferred by the Will to the Trust. Even though revocable inter vivos trusts may have the practical effect similar to or identical to a will, " it is universally held that such a transaction is not rendered testamentary." George Gleason Bogert et. al., Bogert's The Law of Trusts and Trustees § 104 (2008); In re Crandall, 173 B.R. 836, 838 (Bankr. D. Conn. 1994).
The Trustee uses the phrase " immediate distribution" in her argument; however, there is no immediate time frame for the distribution to be made under the Trust agreement. The document states that " The Survivor's Share shall be held, administered, and distributed by the Trustee . . ." and allows the trustee the power to defer division or distribution for a period of six months after the last settlor's death. See Section 5.3 of the Trust. The Trust document also directs the trustee to pay death taxes, debts, and burial expenses prior to allocating the beneficiaries' shares. See Section 5.1 of the Trust.
A pour over devise is " a provision in a will that (I) adds property to an inter vivos trust . . . or (ii) funds a trust that was not funded during the testator's lifetime but whose terms are in a trust instrument that was executed during the testator's lifetime." RESTATEMENT (THIRD) OF PROPERTY § 3.8 (1999). The validity of this type of testamentary addition to a trust is determinable by state law. CAL. PROB. CODE § 6300.
The California Probate Code provides that a devise may be made by will to the trustee of an established trust and that " unless the testator's will provides otherwise, the property so devised (1) is not deemed to be held under a testamentary trust of the testator but becomes part of the trust to which it is given and (2) shall be administered and disposed of [according to the terms of the trust]." Id .
Therefore, the Properties were devised through a pour over provision to the Trust, not to the Debtor. The Debtor was a contingent beneficiary of the Trust at the date of his bankruptcy filing and had no direct interest in the Properties. The Debtor's interest and right to the Properties became a vested interest under the terms of the Trust when his mother died. It was not acquired through bequest, devise or inheritance. Schmitt v. Burton (In re Schmitt), 215 B.R. 417, 422 (9th Cir. BAP 1997) (a debtor's interest in a revocable inter vivos trust is not a property right); In re Spencer, 306 B.R. 328, 336 (Bankr. C.D. Cal. 2004).
The Trustee tries to maneuver around this outcome by arguing for the adoption of a federal law definition of bequest, devise, or inheritance so that an inheritance includes all property transfers upon death. However, as we noted above, there is no bankruptcy case which supports the Trustee's argument. We conclude that no compelling rationale has been provided in this case to depart from the general Butner principle that the interest of a bankruptcy estate with respect to particular property is determined under applicable state law. Butner v. United States, 440 U.S. at 54. There is no basis to apply anything other than the general state law definitions of bequest, devise or inheritance in interpreting § 541(a)(5). In re Crandall, 173 B.R. at 839 (" The court is constrained to give a narrow construction to the words 'bequest, devise, and inheritance' and to conclude such words in their plain meaning do not encompass revocable inter vivos trusts."). We find no authority to support the Trustee's assertion that the Debtor's interest in the Trust assets is property of the estate.
VI. CONCLUSION
The Debtor's interest in the Trust, at the time of his bankruptcy filing, was a contingent beneficial interest in a revocable inter vivos trust and was not property of the bankruptcy estate. After Debtor's mother died, the Debtor had a right to a share of the distribution of the Trust property, or its value, consisting of all assets of the Trust including the Properties. This right was acquired through vesting of his interest in the Trust, not through bequest, devise, or inheritance, and is, therefore, not included in the estate. Because the inter vivos trust is not property of the estate, we need not reach the issue of whether the Debtor's interest is protected by a valid spendthrift provision. For these reasons, the bankruptcy court's order is AFFIRMED.