According a study prepared for the AARP’s Public Policy Institute, “the rate of bankruptcy filings among Americans 55 and older has nearly tripled since 1991.” The results of this study are a cause for concern because the results “indicate that financial security is progressively eroding for many older Americans.” (As printed in Consumer Bankruptcy News, Volume 18, Issue 16, 2, July 3, 2008.) A logical question may be why some of these older Americans are filing bankruptcy, especially where many may be exempt from the actions of their creditors. Unfortunately, many of these older Americans choose to file to stop creditor harassment or file as a means of estate planning so their relatives do not have to “deal with the debt.” One common pitfall in bankruptcy that tends to harm elderly debtors or their family members is the creation of a life estate.
Life estates may pose a hurdle to elderly persons if they do not live in the home, but more often, the elderly person conveys real estate to a family member and reserves a life estate for him or herself. If the family member experiences financial difficulty, then the transfer of property may be an insurmountable obstacle in the family member’s bankruptcy case. This remainder interest in real property is an interest in real property that must be protected in a bankruptcy case. If the interest is unprotected, then the remainder interest becomes property of the bankruptcy estate, which causes problems for both the life estate holder and the remaindermen.
Under the Bankruptcy Code, the conveyance of a fee simple, reserving a life estate, acts as a present conveyance of the real property and, therefore, the real property becomes property of the bankruptcy estate. Rarely is it a problem to protect the debtor’s interest where the debtor is the holder of the life estate and where the debtor lives in the home of which he holds the life estate. (See Peoples’ State Bank v. Stenzel (in Re Stenzel), 301 F.3d 945, 948 (8th Cir. 2002). This debtor typically can exempt the interest in the life estate under the homestead exemption using federal or state exemptions. However, life estate issues arise when the life estate holder or the remainderman is a debtor who does not live in the home even where the debtor’s interest in the real property has not vested. See State ex rel. Cooper v. Cloyd, 461 S.W.2d 833, 838, 839 (Mo. en banc 1971). See also In re Dennison, 129 B.R. 609 (Bankr. E.D. Mo. 1991). In this scenario, the debtor’s interest cannot be protected using the homestead exemption and can be protected only under the wildcard exemption of the federal exemptions. 11 U.S.C. § 522 (d)(5).
Oftentimes, the value of the interest exceeds the allowable exemptions under the Bankruptcy Code. In these situations, the interest must be purchased from the bankruptcy estate or face the potential sale of the interest. For these reasons, life estates can be a tricky business in bankruptcy cases.