Spendthrift Trusts

Here at Shenwick & Associates, as part of our bankruptcy, creditors' rights and asset protection planning practice, we get many questions about spendthrift trusts.

A spendthrift trust is a trust that is settled for the benefit of a person (usually a person who is believed to be unable to control his or her spending) that gives a trustee authority to make decisions as to how the trust funds may be spent for the benefit of the beneficiary. In this post, we are specifically not discussing trusts that are self–settled (where the grantor/settlor is also the beneficiary). Creditors of the beneficiary generally (but with exceptions, discussed below) cannot reach the funds in the trust, and the funds are not actually under the control of the beneficiary.

To qualify as a spendthrift trust, the trust agreement should generally include a spendthrift provision–a provision that creates an irrevocable trust preventing creditors from attaching the interest of the beneficiary in the trust before that interest (cash or property) is actually distributed to him or her. Also, the trust agreement should not provide for mandatory distributions to beneficiaries (which allows the accumulation of income), but should provide for distributions at the discretion of the trustee. However, once a distribution is made from the trust to the beneficiary, creditors can attach that distribution.

In New York, there are two ways a creditor can attach the income a beneficiary receives from a trust. One way is via § 7-3.4 of the Estates, Powers and Trust Law, which provides that if a trust doesn't provide for accumulation of income (i.e. all income from the trust must be distributed at least annually), then a judgment creditor can reach all of the income due the beneficiary in excess of the amounts required for his or her education and support.

The other way is through § 5205(d) of the Civil Practice Law and Rules (CPLR). This section of the CPLR governs personal property exempt from the satisfaction of money judgments. Subsection (d) provides that a creditor can reach 10 percent of the income interest of a trust. However, if a court determines that the reasonable needs of the beneficiary and his or her dependents can be met by less than 90 percent of the trust income, then a greater percentage of the income can be reached by the creditors.

In a Florida bankruptcy case that applied the provisions of the CPLR to a New York spendthrift trust, the bankruptcy court took into account the beneficiary's total income and support from all sources, held that half of the trust income was unnecessary to meet the reasonable needs of the debtor and her dependents and concluded that such income could therefore be reached by the beneficiary's creditors.

In bankruptcy, spendthrift trusts are exempted under § 541(c)(2) of the Bankruptcy Code, which provides that "[a] restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable non-bankruptcy law is enforceable in a case under this title." So if a spendthrift trust is validly created pursuant to applicable state or federal (i.e. qualified retirement plans) law, then the spendthrift trust will not be property of a debtor's bankruptcy estate and not be subject to reach by creditors or the bankruptcy trustee.

To learn more about spendthrift trusts or protecting your assets from creditors both inside and outside of bankruptcy, please contact Jim Shenwick.

For Whom the Tax Debt Tolls

Here at Shenwick & Associates, many of our more challenging personal bankruptcy cases involves past due tax debts. We've previously written about the complex rules involving the dischargeability of taxes here and here.

This month we want to discuss the concept of "tolling." There are several types of events that serve to stop the clock on various time periods that determine when an income tax becomes dischargeable:

• A prior bankruptcy case. The filing of a bankruptcy case will toll both the rule that a tax must be more than three years past its due date to be dischargeable in bankruptcy (the "3 year rule") and the rule that a tax must have been assessed for more than 240 days to be dischargeable in bankruptcy (the "240 day rule")

• An request for a due process hearing or an appeal of a collection action taken against a debtor. The same rules apply.

• An offer in compromise. We recently wrote about offers in compromise, which are offers to compromise (or settle) a tax debt for less than the full amount due. The submission of an offer in compromise will toll the 240 day rule. If the taxpayer makes an offer in compromise within 240 days of filing for bankruptcy, the 240 day time rule will be suspended for the time during which the offer in compromise is pending, plus an additional 30 days.

• Tax litigation. Litigation with taxing authorities in U.S. Tax Court or other venues will toll both the 3 year rule and the 240 day rule.

• A request for an extension of time to file a tax return. Filing for an extension will: (a) delay the start of the 3 year rule to the extended due date; (b) delay the start of the rule that a tax is not dischargeable in bankruptcy until more than two years from the filing date (the "2 year rule") until the actual filing date; and (c) delay the start of the 240 day rule until the tax is actually assessed.

To get an idea of how your past due tax debts might be handled in bankruptcy, please contact Jim Shenwick.

Happy holidays from Shenwick & Associates!

As the holiday season gets fully into swing here in midtown Manhattan, we at Shenwick & Associates wanted to take this time to wish you a happy, safe and warm holiday season and a very happy and healthy 2015. We also wanted to thank you for your friendship, your business, your referrals and your trust in us. Personal and business bankruptcies and workouts are keeping us busy as 2014 draws to a close. We're here for you now and in the upcoming year, and we look forward to working with you.

We also wanted to update you on the fascinating case of Santiago-Monteverde v. Pereira (In re Santiago-Monteverde), which we've previously discussed here. When we last wrote about this case, the Second Circuit Court of Appeals had certified the following question to the New York State Court of Appeals:

Whether a debtor‐tenant possesses a property interest in the protected value of her rent‐stabilized lease that may be exempted from her bankruptcy estate pursuant to New York State Debtor and Creditor Law Section 282(2) as a "local public assistance benefit"?

In a decision issued on November 20th, the New York State Court of Appeals held in a 5-2 vote to answer the question in the affirmative. Writing for the majority, Judge Abdus-Salaam held that "[t]he rent-stabilization program has all of the characteristics of a local public assistance benefit" and "[w]hile the rent-stabilization laws do not provide a benefit paid for by the government, they do provide a benefit conferred by the government through regulation aimed at a population that the government deems in need of protection."

The 2nd Circuit Court of Appeals still needs to issue its decision in the next few months, but this ruling finally settles that rent–stabilized and rent–controlled tenants in New York State no longer have to fear losing their leases when considering a Chapter 7 bankruptcy. Any persons having questions about personal bankruptcy or the Santiago-Monteverde v. Pereira (In re Santiago-Monteverde) case should call Jim Shenwick.

Happy holidays and happy 2015 from Shenwick & Associates!

Offers in compromise

Here at Shenwick & Associates, many of our personal bankruptcy clients have issues with tax debts that they're looking for our guidance on. The issue of taxes in bankruptcy is a complex one that we've covered in a prior post.

However, there are many circumstances in which taxes are not dischargeable in bankruptcy, including taxes that were recently assessed or for which a tax return was recently filed. One alternative for debtors who are looking to either reduce or pay their tax debts that aren't dischargeable in bankruptcy is an offer in compromise (OIC). OICs are available to both individuals and businesses.

In evaluating an OIC, the IRS will consider several factors, including: 

• Ability to pay;
• Income;
• Expenses; and
• Asset equity.

Preparation of an OIC package requires a detailed listing of the debtor's income, expenses and assets. The process starts by preparing a Form 433-A (OIC) (Collection Information Statement for wage earners and self–employed individuals). The Form 433-A (OIC) is an eight page form in which the debtor must list all of his or her financial information and calculate their future remaining income. Along with any available individual equity in assets and available business equity in assets, this becomes the basis for the debtor's offer amount to the IRS.

Based on these results, the debtor will submit a Form 656 (Offer in Compromise) along with the appropriate backup Collection Information Statement, a non–refundable $186 application fee and an initial payment (also non–refundable).

Keep in mind that there are some factors that may make a debtor ineligible for an offer in compromise:

• The debtor must not be in an open bankruptcy proceeding;
• The debtor must have filed all required federal tax returns;
• The debtor must have made all estimated tax payments; and
• The debtor must have submitted all required federal tax deposits (if they are self–employed and have employees)

We file OICs for clients. For more information about how you and your family can reduce or eliminate your tax debts, please contact Jim Shenwick.