In Minnesota, the general rule of ownership is that ownership follows title.  When there is an official record of ownership, such as a vehicle or boat title, a deed, bank account, or certificate of ownership, the people listed as owners on that record are the owners of that asset. If there is no official record of ownership, then it is presumed that the person who purchased, uses, or possesses the item is the owner. When there is one owner of property, then that property belongs solely to that person, and its treatment as an asset of the person who filed bankruptcy is quite straightforward. 

However, when two or more people own an asset, it becomes more complicated. There are a number of different ways that people can own an asset together, such as joint ownership, ownership of a life estate or remainder interest, as a beneficiary of a trust, and as custodian or trustee for another person. Each of these different types of co-ownership is treated differently in bankruptcy.

JOINT OWNERSHIP

In Minnesota, when two people own an asset outright, such as being named as “joint tenants” or “tenants in common,” they are joint owners, which means that they each own a fractional interest in the asset proportionate to the number of owners. If one of the owners files bankruptcy, then that owner’s fractional interest becomes property of the bankruptcy, and any equity in that asset must be exempted or, if not exempted, be subject to being sold by the Bankruptcy trustee. The other co-owner’s fractional interests in the property do not become property of the bankruptcy estate, but can nevertheless be affected by the bankruptcy because the bankruptcy Trustee has the right to sell the nonexempt part of the property that is in the bankruptcy estate. 

If the asset can be easily divided and sold, then the Trustee can sell the part of the asset that is subject to the bankruptcy and leave the co-owner’s share intact (for instance, two siblings own a stock account containing 50 shares of stock; one-half of the stock, or 25 shares, can be easily sold, and the other co-owner can keep his or her remaining 25 shares of stock). However, if the asset cannot be easily divided and sold, then the Trustee can seek to sell the entire asset if the trustee can prove that the benefit to the bankruptcy outweighs the harm to the co-owner(s) that did not file bankruptcy. If the Court approves the sale of the asset, the co-owner(s) that did not file bankruptcy have the right to their fractional part of the money obtained when the asset is sold (for instance two siblings own a lake cabin worth $50,000.00; there is no way to divide the cabin in half, so the Trustee could seek to sell the cabin and pay half of the proceeds to the co-owner, and use the remaining half in the bankruptcy). This is rare, but can happen. More often, the Trustee will offer to sell the part of the asset in the bankruptcy estate to the co-owners, or will place a lien on the asset.

LIFE ESTATES AND REMAINDER INTERESTS

A life estate is a way of dividing ownership by time measured by the lifetime of the owner. This is common for people to create a life estate for themselves in making an estate plan in which the owner retains ownership of an asset until they die, at which point the asset becomes someone else’s. The ownership interest the creator retains is called the life estate. The ownership interest that is given after the life estate ends is called the remainder interest.  

A remainder interest in property is an interest that must be disclosed in the bankruptcy petition when a person files bankruptcy. While a remainder interest is a hard thing to value, the standard in Minnesota is to use IRS Life Estate tables which calculate the percentage of ownership of a remainder interest by factoring the life estate owner’s age and a specific present-day federal interest rate. A value of the life estate interest can then be obtained to list in the bankruptcy petition. This property must then either be exempted from the bankruptcy estate, or be dealt with by the Trustee. The Trustee has a number of options including letting the remainder interest pass through the bankruptcy estate without the Trustee doing anything; selling the remainder interest back to the holder of the life estate or to another remainder holder; putting a lien on the property for the value of the remainder interest; or keeping the bankruptcy case open until the property is sold.  

If you have a life estate or remainder interest, make sure to talk to your attorney about it.

TRUSTS

A trust is a legal entity created by a person (the “grantor”) who gives legal title to a “trustee” (this is NOT the same as a Trustee in bankruptcy) who has the right and duty to hold and manage that property for the benefit of someone (the “beneficiary”). A trust may have several different beneficiaries, and can provide for each beneficiary to have different rights to income or property from the Trust at different times.  

A beneficiary’s interest in a trust is an asset that must be disclosed when filing bankruptcy. However, a beneficiary’s interest in a trust may or may not be affected by the bankruptcy, depending on who created the trust and when, who the trustee is, and what specific language is used in different parts of the Trust. Analyzing a trust and whether a trust will be affected by a bankruptcy is a complicated task, and must be done before you file for bankruptcy. There are a few general rules, however:

• An enforceable spendthrift clause (language in the trust which restricts when and how creditors can try to get assets in a trust) is generally enforceable in bankruptcy. This means that if the trust contains spendthrift language that is enforceable under state law, then the bankruptcy court can’t take any of the beneficiary’s assets held in trust.  
• If the trustee and the sole beneficiary are the same person, however, the spendthrift clause is invalid in Minnesota. 
• The bankruptcy code states that a self-settled trust (meaning a trust in which the grantor who created the trust is the beneficiary) created in the last 10 years is not protected from the Trustee. 

In summary, if you are the beneficiary of a trust, you must tell your bankruptcy attorney before you file bankruptcy.  We have experience with Trusts and bankruptcy law, and will be able to advise you about whether your interest in the Trust will be protected if you file bankruptcy.

CUSTODIAL AND UTMA ACCOUNTS

Many of our clients have created accounts for their children or grandchildren. This is a great practice to help children and grandchildren save. However, these accounts can present a problem in bankruptcy. Most of the time, these accounts are simply joint accounts, where the parent or grandparent is a joint owner of the account (and the money) in the account. This can cause problems in cases in which the parent files bankruptcy and may not be able to exempt any of the money in the account. Often we can prove that the money in the account was deposited by the child and is therefore not property of the bankruptcy estate, but sometimes it is not possible, and the Bankruptcy Trustee can reach the parent or grandparent’s portion of the account.   

The Minnesota Uniform Transfers to Minors Act provides that a person can create an account for a minor child in which the adult is only the “custodian” for the minor child, which means that the minor child owns the account, but the adult is holding the account in trust for the minor child. The account must generally be identified by the bank holding the account as a “custodial” or UTMA account. When a person who is the custodian for a minor child’s account files bankruptcy, the account is not property of the person who filed bankruptcy, because the adult is only the custodian for the child’s assets. (Beware, however, that the Bankruptcy Trustee can still get property back from the minor child’s account if the adult custodian put money in the account to hide or shield the money from his or her creditors).