It’s important to plan carefully if you are planning to file for bankruptcy and you know you have a large inheritance or gift coming your way.
In Chapter 7, an inheritance you acquire, or become legally entitled to acquire, within 180 days after filing generally becomes part of the bankruptcy estate, subject to applicable exclusions and exemptions. The filing date starts the clock. What matters is when your legal right arises, not simply when the money or property is delivered, so a later payment does not necessarily avoid the rule. Closing the case does not by itself prevent administration of estate property; a closed case may be reopened to administer assets. 11 U.S.C. § 541(a)(5)(A); § 350(b); § 554(c)–(d).
An ordinary gift from a living person first acquired after you file is not automatically included just because it arrives during those 180 days. The inheritance provision covers bequests, devises and inheritances, rather than every gift. Property interests you already had when you filed are analyzed separately, even if payment comes later. Tell your bankruptcy attorney about the asset so its treatment and any exemption can be evaluated. 11 U.S.C. § 541(a)(1), (a)(5)(A); In re Vetsch, 620 B.R. 150 (Bankr. W.D. Wash. 2020), decision pp. 5–9.
A properly created spendthrift trust may protect a beneficiary’s interest, but it is not automatically beyond creditors’ reach. Bankruptcy law honors a trust’s transfer restriction only to the extent it is enforceable under applicable nonbankruptcy law. The trust’s terms, governing law, your rights at filing and any later distributions require review. In Washington, some interests already accrued and ready for distribution when you file can be reachable. The person planning the inheritance should obtain individualized estate-planning advice coordinated with your bankruptcy advice. 11 U.S.C. § 541(c)(2); Patterson v. Shumate, 504 U.S. 753, 758–60 (1992); In re Hoover, 646 B.R. 488 (Bankr. W.D. Wash. 2021), decision pp. 16–17; In re Vetsch, decision pp. 9–12.
Property is not automatically auctioned simply because it becomes part of the bankruptcy estate. Exemptions may protect qualifying property, subject to the applicable requirements and limits. That differs from an exclusion, which keeps an interest outside the estate in the first place. A trustee may also abandon property that is burdensome or offers inconsequential value and benefit to the estate, following the required process. 11 U.S.C. § 522(b); § 541(c)(2); § 554(a).
Over the past 34 years, we have helped over 2,300 Washington clients obtain financial relief and a Fresh Start by filing a Chapter 7 or Chapter 13 Bankruptcy. We offer a free consultation to determine whether we can help you as well.
Over the past 34 years, the Law Offices of Christopher A. Benson has helped clients with estate planning. Contact our Federal Way office for a free initial consultation to discuss your goals and planning options.
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