4.4 Interests Arising Upon the Death of a Non-debtor

• Library: Bankruptcy Practice in Virginia (Virginia CLE) (2017 Ed.)

4.4 INTERESTS ARISING UPON THE DEATH OF A NON-DEBTOR

4.401 In General. Debtors receive property upon the death of non-debtors, either by intestate succession, by will, on the termination of a revocable trust that contains dispositive provisions taking effect upon the death of the primary non-debtor beneficiary, or pursuant to life insurance contracts. These interests are property of the estate under section 541(a)(5).

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4.402 Death Occurring Before the Bankruptcy Filing.

A. In General. If the death occurs before the bankruptcy petition is filed, the inheritance or right to life insurance benefits is property of the estate under the general, wide embrace of section 541(a), namely, that all property interests of the debtor as of the case commencement are property of the bankruptcy estate. The fact that the asset has not yet been distributed to the debtor by the decedent's personal representative or that the insurance benefit payment has not yet been received is not material. The right to the asset or money is property of the estate, and when the asset or money is transferred, it becomes property of the estate.

B. Disclaimer. The Uniform Disclaimer of Property Interests Act ¹⁴⁴ allows a person to disclaim an inheritance. Upon a proper disclaimer being made, the decedent's assets pass as if the disclaiming person had predeceased the decedent. If the bankruptcy is filed after the disclaimer is made, assets that otherwise would have been owned by the debtor are not part of the bankruptcy estate. ¹⁴⁵

Although there is no current controlling authority in Virginia federal courts, the courts of appeal that have considered the issue have ruled that a pre-bankruptcy disclaimer is not a fraudulent or voluntary conveyance under section 548. ¹⁴⁶ The basis for the reasoning is that under most state disclaimer statutes, including Virginia's, the disclaimer involves a "relation back" fiction that requires the passing of the decedent's assets as if the disclaiming heir had predeceased the decedent. ¹⁴⁷ Consequently, there is no property interest recoverable under section 548. Although the United States Supreme Court ruled that a tax lien attaches despite a disclaimer, ¹⁴⁸ the courts of appeal that have considered the issue have not allowed bankruptcy trustees to avoid disclaimers as fraudulent conveyances. ¹⁴⁹

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4.403 Death Occurring After the Bankruptcy Filing.

A. In General. Section 541(a)(5) expands the time horizon for 180 days past the bankruptcy filing date for assets acquired by the debtor, or which the debtor becomes entitled to acquire, by testate and intestate succession and from life insurance or a death benefit plan. If the debtor acquires the right to the property during the 180 days after filing, the right and eventually the property become assets of the bankruptcy estate. ¹⁵⁰

B. Tenancy by the Entireties Property. In Birney v. Smith (In re Birney), ¹⁵¹ a case from Maryland, which has entirety principles similar to Virginia's, the Fourth Circuit ruled that the termination of entirety ownership by the death of a non-debtor spouse does not result in the entirety interest becoming estate...