Residence Held by Trust Exempt as Homestead in Bankruptcy

June 8, 2007 | Roger McEowen

 

A bankrupt debtor’s homestead is exempt property that is not subject to the claims of creditors. In Kansas, a homestead comprises 160 acres of agricultural land, or one acre in a town or city, or a manufactured or mobile home that is occupied as a residence. In this case, the debtors (a married couple) purchased their home in 1994. In 1996, they transferred the residence to a revocable trust in which the wife served as the trustee and both the husband and wife were named as beneficiaries. In 2002, the couple filed a joint bankruptcy petition and claimed that the residence was exempt from the bankruptcy estate as a homestead. The trustee objected on the basis that the debtors did not “own” the residence at the time of the bankruptcy filing. The bankruptcy court ruled against the trustee as did the bankruptcy appellate panel. The trustee appealed to the U.S. Court of Appeals for the Tenth Circuit, which declined to rule on the case and instead sent the case to the Kansas Supreme Court for a ruling on the application of the Kansas statutory homestead exemption to a residence that has been transferred to the debtors’ own revocable trust before filing of the bankruptcy petition.

The Kansas Supreme court, in a rather lengthy opinion, noted that the origin of the homestead exemption was in the Kansas Constitution and that the provision was intended to protect a debtors’ homestead and that the right has been “zealously” guarded by the Kansas courts. The court also cited the policy reasons behind the homestead exemption to protect the family from destitution, and society from the dangers of her citizens becoming paupers.”  The court then noted that the exemption applied to situations where the debtor has less than full title to the homestead and less then fee simple (absolute) ownership. As such, the court concluded that the homestead exemption could be claimed by debtors having any interest in the homestead, whether legal or equitable title, as long as the debtor still occupies the property or does not intend to abandon occupancy. Thus, the debtors’ residence was exempt from the bankruptcy estate as a homestead.

The court did not mention that a transfer of title ownership of a residence from the debtor outright to the debtor as trustee of the debtor’s revocable trust changes nothing from a property law standpoint. Even if the beneficiaries would have been different from the transferors/debtors, the beneficiaries still would have no interest in the trust property because the trust could be revoked by the transferor at any time before death. As such, the residence would remain exempt as a homestead. Redmond v. Kester, No. 97,627, 2007 Kan. LEXIS 355 (Kan. Sup. Ct.Jun. 8, 2007).