John Public owed $4 million to Third National Bank of Nashville (TNB), a debt that was secured by (among other assets) a residence at 337 South Maple. TNB declared its intention to foreclose on the home, but stated it would release its lien on the home in return for a payment of $490,000.
John didn’t have the money, but John’s mother did. The very next day she wired $490,000 to TNB and then executed a warranty deed transferring title to the property back to John and his wife through a trust called “The John Q. Public Family Residence Trust.” John and his wife became co-trustees and their children became beneficiaries and contingent beneficiaries of the trust.
Specifically, the trust stated that the home was to be the residence of John and his wife during their lifetimes. It also named four other individuals who could live in the home upon John and his wife’s death.
John Goes Bankrupt
Fast forward two decades. John and his wife file for Chapter 7 bankruptcy. A creditor of theirs sues. Though both debtor and creditor agree that title to the property is held by the trust, the creditor asks the court to turn the home over to the trustee, the argument being that their interest in the home was a transferable legal life estate.
The bankruptcy court decided that the debtors, John and his wife, had no more than the right to live in the home, according to the equitable life estate. The language of the trust made clear that John and his wife and their children could not lose the right to live in the home.
Further, the court found that the presence of a spendthrift provision, which protects a beneficiary from assigning away his or her inheritance and also protects against creditors, was further evidence that John’s mother intended to prevent John and his wife from transferring title to the home to the detriment of themselves or their children.
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