Asian Journal- The Filipino-American Community Newspaper

WHEN you transfer title to your house to your living trust you cease to be the owner of the house because title to the house is now held by your living trust. The living trust helps avoid probate taxes when you die. But when you file a bankruptcy, the transfer of title to the living trust may compromise your homestead exemption. How does this happen? A debtor in bankruptcy can exempt the equity in his residence only if he owns the house. When debtor transfers title to the house to his living trust, the new owner of the house is the living trust, not the debtor. Therefore, strictly speaking, if debtor files for bankruptcy after he transfers title to his house, he can no longer claim a homestead exemption for his residence in his bankruptcy. You can be sure that Chapter 7 trustees are going to use this argument to get the house and sell it if there is substantial equity in the house. To illustrate, debtor’s residence has a current fair market value of $300,000. There is only one mortgage on the house with an outstanding balance of $150,000. Hence, the debtor has equity of $150,000. A month before he files his bankruptcy, he transfers title to the house to his living trust. At the 341a hearing, Chapter 7 trustee asks debtor what legal basis he has for claiming the $150,000 of equity as exempt. Debtor replies that he is 65 years old, has lived in the house for 30 years, and that he owns the house. Trustee disagrees with debtor saying that debtor does not own the house because debtor transferred ownership of the house to his living trust a month before he filed bankruptcy. Then, trustee asks debtor to hand him his keys to the house because trustee intends to sell the house for the benefit of creditors. Who is correct? Is debtor correct in claiming his house as exempt homestead? Or, is trustee correct in claiming the house to be nonexempt assets of the bankruptcy estate?

These facts came squarely before the court in RE RODRIGUES. The Chapter 7 debtor and her late husband purchased their home in 1979. After her husband died, the debtor transferred the house to a Living Trust as part of estate planning. In 2008, less than one year before she filed for bankruptcy, the debtor executed and recorded a homestead declaration with respect to the property. When the debtor filed for bankruptcy, she scheduled the property as being worth $250,000 and subject to a lien of $116,000. She claimed the property as exempt. There was no dispute that the debtor, an elderly widow, had lived in the house since 1979. There was also no dispute that the title to the property remained in the Trust. Trustee argued that property held in trust could not be claimed as exempt. Debtor argued that she revoked the trust when she filed the homestead declaration. The court found that while the debtor may have intended to revoke the trust, the filing the homestead did not have that effect. "In the absence of a writing in which the debtor expressly stated that she was revoking the Trust, and in the absence of a deed from the Trust back to the debtor, the Court concludes that the Trust was not revoked and that the debtor was not the legal owner of the property for purposes of claiming a homestead…" the court said.

However, the court added: "Although the debtor may not have successfully revoked the Trust, the record contains evidence in the form of the Declaration of Homestead and Schedule A that she viewed the property as her home and intended to occupy it as such… this Court finds and predicts that the Supreme Judicial Court also would find that the debtor rightfully possessed the property through grant of occupancy to herself and validly claimed a homestead…" Hence, the court overruled trustee’s objection and found for debtor.

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Lawrence Bautista Yang specializes in bankruptcy, business, real estate and civil litigation and has successfully represented more than five thousand clients in California. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S. Fremont Ave., Bldg. A-1 Suite 1125 Unit 58, Alhambra, CA 91803.