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Keywords

trustwillbankruptcychapter 7 bankruptcyobjectionsustained
trustbankruptcychapter 7 bankruptcyobjectionsustained

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In re Lunkes, 406 B.R. 812

Facts

John W. Lunkes established the John W. Lunkes Trust on March 1, 2002, to provide income during his lifetime and distribute the trust's assets to his five children upon his death. After John's death on July 6, 2003, a dispute arose between the successor trustee and one of the beneficiaries regarding the sale of commercial properties held in the trust. The debtor, William J. Lunkes, filed for Chapter 7 bankruptcy on January 9, 2009, claiming an exemption in his inheritance from the trust, which the Chapter 7 Trustee challenged.

The Debtor filed a voluntary chapter 7 bankruptcy petition on January 9, 2009.

Issue

Whether the John W. Lunkes Trust is a spendthrift trust, and if it is, whether the debtor's interest in it is exempt from the bankruptcy estate.

The issue is whether the John W. Lunkes Trust is a spendthrift trust.

Rule

Under § 541(a)(1) of the Bankruptcy Code, the property of the bankruptcy estate includes all legal or equitable interests of the debtor in property. A spendthrift trust must have provisions that restrict the beneficiary's ability to alienate the trust corpus and must not be self-settled.

Under § 541(a)(1) of the Bankruptcy Code, the property of the bankruptcy estate includes 'all legal or equitable interests of the debtor in property.'

Analysis

The court analyzed the trust provisions and determined that the debtor had an immediate right to distribution upon the death of the settlor, which invalidated the spendthrift nature of the trust. The trust's language indicated that the trustee had no discretion in distributing the assets, and the debtor's right to a distribution vested at the time of John's death. Additionally, the court noted that the trust's anti-alienation clause did not prevent the debtor from having control over his interest in the trust.

The Debtor acknowledges that a spendthrift trust cannot be found where the settlor is the beneficiary.

Conclusion

The court concluded that the John W. Lunkes Trust was not a spendthrift trust under Illinois law, and therefore, the debtor could not claim an exemption in his interest in the trust. The Chapter 7 Trustee's objection to the debtor's claimed exemption was sustained.

For the foregoing reasons, the Chapter 7 Trustee's objection to the Debtor's claimed exemption in the John W. Lunkes Trust is SUSTAINED.

Who won?

Chapter 7 Trustee Frances Gecker prevailed in the case because the court found that the trust did not qualify as a spendthrift trust, allowing the debtor's interest to be included in the bankruptcy estate.

The Chapter 7 Trustee challenges the Debtor's claimed exemption on the grounds that the inheritance at issue is not a spendthrift trust and is not entitled to an exemption under the U.S. Bankruptcy Code.

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