Who Gets the Money? IRS, BK Court, or Co-Beneficiary?

[Sharon10]

What is the name of your state? WA and CA

Mar., '05: My father passes away. I, as first trustee, don't do anything with his living trust, as I believe there are no assets in it. My sister and I are listed as equal beneficiaries in the trust.

April, '05: I file Ch. 7 in WA state.

July, '05: My Ch. 7 is discharged.

Mar., '06: I find out through my cousin that our fathers co-owned property in CA. I find out this property was transferred to the trust before my father's death.

April., '06: On advice from my attorney, I convert my Ch. 7 to a 13 and list the property for sale.

May, '06: I find out my father never filed his income taxes for a few years and probably owes IRS, due to his withdrawing money out of an annuity (0 balance at time of death). I have no money at the time to have his taxes done, so I don't know the amount, but it is probably significant.

I am now ready to file his taxes. Questions--

1. When the CA property sells, who gets the money first; the IRS or the BK court? Don't my father's taxes take priority before any beneficiaries are paid out of the trust?

2. If I don't make enough profit from the sale of the property to pay off all my creditors, will the BK court take the difference from my sister and/or cousin's share?

I have heard different answers to both these questions. My BK lawyer doesn't seem to know (or be concerned), but I am worried that the IRS will come after me for my father's taxes. I also want to make sure my sister and cousin get their shares. Do I need a probate attorney to figure this out?

I know this is complicated. Thanks so much!

[azatty]

1. In general, neither. The trust owned the property, so the trust gets the money. The IRS merely has a claim against your father's estate. However, depending upon the date of the transfer, the property could get pulled back into the taxable estate. Also, to the extent that the IRS has a recorded tax lien, the money from the sale would be paid to the IRS first.

2. No. Your bankruptcy estate only includes property YOU own or to which you have some right. The court cannot take your sister's share or your cousin's share. Moreover, the bankruptcy trustee might not even have a claim to the money--if the trust is a spendthrift trust, the bankruptcy trustee usually cannot take your share (the rules get a little complicated depending on whether you have only trust "res" and trust income to deal with).

You have an issue with the taxes that cannot be resolved upon the limited information you've given. Furthermore, without seeing the trust document it is difficult to answer the bankruptcy question. I'd suggest contact a local attorney who deals with estate planning issues. You already have a bankruptcy attorney, but it sound like he might not understand the law in this area--absent some compelling circumstance, I wouldn't have recommended converting the 7 to a 13 (if the trust is not a spendthrift trust, then maybe I'd do what he did, but I don't see any real reason for it).