The Massachusetts bankruptcy law now allows personal residences held in a trust to be protected under the Massachusetts Homestead statute. It is important to note that the law gives $125,000 in protection to all residents, with or without filing a Homestead in the Registry of Deeds. The law gives $500,000 in protection to properly filed Homesteads. This 2011 law, as it affects trusts, is now being reviewed and challenged in various ways.
First, How Do You Protect Your Home When it’s in a Trust?
Trusts add a layer of protection and a layer of complication. Done properly, they can be a very helpful tool. They should only be undertaken by an experienced trust and estate attorney. Once the property is in the trust, the trustee can sign and file a Homestead, thus giving the beneficiaries of the trust significantly more protection. (Note the trustee, not the beneficiary, is obligated to file the Homestead.) The Homestead must clearly identify who is the protected resident of the home; that is which person or persons are protected. This is important because sometimes someone who is not a beneficiary of the trust may be protected by the Homestead.
Now, What About A Trust with Various Beneficiaries in Bankruptcy?
In a case decided by the United States Bankruptcy Court for the District of Massachusetts recently, the issue was how much protection a trust provides when there are numerous beneficiaries of the trust. See In re: VanBuskirk, Joseph C. et. al. Chapter & Case Number 13-41947. , In that case, the Court faced the following scenario: First, the trustee neglected to file a Homestead after setting up the trust at issue. Second, the trust was held for the following beneficiaries: the three adult children of the residents of the home, and another trust (a trust within a trust) benefitting the two residents (the parents, Joseph and Patricia VanBuskirk).
In an interesting decision the Court found the law one of “teeth-cracking complexity” because of the way trusts were written and the history of changing legal ownership several times. This one certainly was not a standard trust setup, nor was the history. The VanBuskirks were clearly trying to protect themselves, their disabled son with whom they live, and the asset they want to go to their children. It’s not clear from the decision why they filed Chapter 7 personal bankruptcy. However, the Court looked to the intent of the legislature when drafting the Homestead law: the intent was to give protection to ordinary people who put their homes in trust.
The final answer in this case is that the Homestead protection is only $31,250 because this is 25% of the Massachusetts automatic Homestead protection and 25% is all of the beneficial ownership the couple living in the house owned. The rights of the children do not “spill over” to protect the parents.
What Should You do to Avoid Your Home Being At Risk in Bankruptcy?
In this case, if Joseph and Patricia (the 25% owners via the trust within the trust) had simply filed a Homestead under Section 2 of Chapter 188 they would each have a $500,000 Homestead if they were each over 62. It’s not clear why this was not undertaken because clearly a fair amount of legal work was done to manage this situation.
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If you need a consultation for bankruptcy in Boston, call Attorney Neil Burns. He has over 28 years of experience in Chapter 7 bankruptcy.
