"Property of the Estate" Excludes Powers You Exercise for Another's Benefit

 Posted on May 26, 2017 in Bankruptcy

If you have a power of attorney over someone’s assets, or any similar power, those assets are not affected by your bankruptcy case.

“Property of the Estate”

Last time we emphasized that when you file a bankruptcy case everything you own becomes “property of the estate.” That’s what the bankruptcy trustee has jurisdiction over.

Once you know what property of yours the trustee has jurisdiction over, then you can see whether all that property all fits within your available “property exemptions.” Most of the time all of your “property of the estate” does fit within your exemptions. But the first step is knowing what’s included in the “property of the estate.”

Includes Just about Everything

Courts have consistently held that the scope of that term is very broad. “Property of the estate” includes “all legal and equitable interests of the debtor in property,” “wherever located and by whomever held.” See Section 541(a)(1) of the U.S. Bankruptcy Code.

This includes not just tangible property, things that can be touched or held. Property of the estate includes any intangible property—anything of value that’s not physical in nature. If someone owes you money, if you hold a patent or a copyright, or if you own corporate stocks or municipal bonds, these are all intangible property that would be property of your bankruptcy estate.

But There Are Exceptions

The Bankruptcy Code carves out some exceptions, certain narrow kinds of property that aren’t included as “property of the estate.” Examples include:

• Funds withheld by or paid to your employer as contributions to an employee benefit, deferred compensation, annuity, or health insurance plan (Section 541(b)(7))
• Property held in a spendthrift trust (Section 541(c)(2))
• A commercial lease that terminated before the bankruptcy filing (Section 541(b)(2))
• Funds in an educational individual retirement account (Section 541(b)(5))
• A “power that the debtor may exercise solely for [another’s] benefit” (Section 541(b)(1))

Powers Exercised Solely for Another’s Benefit

Focusing on the last one of these, imagine a situation in which you controlled some property for someone else’s benefit. The most common example is probably a power of attorney for a relative, such as a parent. Through the power of attorney document, you do not own your elderly parent’s property; you just control it because the parent needs your help using that property on his or her behalf.

For bankruptcy purposes, even though you have legal control over the property it’s not treated as yours. As long as that power of attorney makes clear that the power can only be exercised on the other person’s behalf, the property included in the power of attorney would not be property of your bankruptcy estate

What would happen if instead that parent had given you all his or her property? Let’s say he or she trusted you to use that property to care for him or her. If that’s all there was to it, when you filed bankruptcy that gifted property would be treated as yours. It would become property of your bankruptcy estate. To whatever extent that property would not be protected by property exemptions, the Chapter 7 trustee would take and liquidate the property to pay your creditors. It would no longer be available to care for your parent.

This big distinction should make it clear that you’ve got to get the advice of a competent bankruptcy lawyer here. It may make sense for various personal reasons for a parent simply to gift property to a trustworthy adult child. But what may appear to make common sense could be disastrous for legal reasons. Get good advice in order to meet your goals.