Transfer Of Inheritance To Special Needs Trust Not Avoidable Under The Bankruptcy Code

In a 2007 U.S. Bankruptcy case from the District of Minnesota, a bankruptcy trustee unsuccessfully attempted to avoid the transfer of a disabled woman’s inheritance into a special needs trust established for the disabled woman. The debtor in Schultz v. Sullivan, 368 B.R. 832 (D. Minn. 2007), was a disabled adult receiving benefits under a Minnesota Medicaid waiver program. In 2004, Ms. Schultz learned that she was to inherit $42,388.27 from her grandmother. The estate attorney paid $16,778.89 of that inheritance directly to Ms. Shultz’s debtors, rendering her debt-free in September 2004. However, Ms. Schultz then fell victim to financial exploitation by a “friend,” which caused her to incur nearly $40,000 in debt. After a limited guardian was appointed for Ms. Schultz, an irrevocable special needs trust was established by the Dakota County District Court, and the trust was funded with the balance of Ms. Schultz’s inheritance.

The bankruptcy trustee had argued that the transfer of the grandmother’s inheritance to a special needs trust for the bankruptcy debtor was a fraudulent transfer. The bankruptcy court noted that, under 11 U.S.C. §548(a)(1)(B), a bankruptcy trustee may avoid a transfer made within 2 years of the filing of a bankruptcy petition if the debtor received “less than a reasonably equivalent value in exchange for such transfer.” The court found that, if Ms. Schultz had taken the inheritance directly, she would have lost her Medicaid waiver benefits (valued at $33,500 in 2007); in addition, she would have lost her “slot” in the related supervised assisted living program and, once she regained eligibility, she would have been placed back on the waiting list for those services for at least three years. Accordingly, the bankruptcy judge concluded that the transfer of Ms. Schultz’s inheritance into the special needs trust constituted an exchange for reasonably equivalent value, and was not an avoidable transfer under the bankruptcy code.

A copy of the bankruptcy case can be found here – sullivan-vs-schultz