In re Cyr, 605 B.R. 784 (W.D. Tex. 2019).

REVERSED -- SEE BELOW

Trusts

Homestead and "Qualifying Trust"

Property Code § 41.0021 allows a person to transfer his or her homestead into an inter vivos trust and have that property retain its homestead protections provided it meets the requirements of a “qualifying trust” such as allowing a settlor or beneficiary to unilaterally revoke the trust, exercise an inter vivos general power of appointment over the homestead property, or use and occupy of the property as the settlor’s or beneficiary’s principal residence at no cost to the settlor or beneficiary (other than payment of taxes and other specified expenses) for a permitted time period such as the life of the settlor or beneficiary. In this case, the settlors’ trust did not meet these requirements and thus the property that otherwise would have been homestead had it not been transferred to the trust was not protected when one of the settlors went bankrupt. For example, both settlors had to act jointly to revoke the trust; the debtor (bankrupt) settlor could not do so unilaterally.

 

Cyr v. SNH NS Mtg Properties 2 Trust, No SA:19-CV-0911-JKP, 2020 WL 7048603 (W.D. Tex. Nov. 30, 2020).

Property Code § 41.0021 allows a person to transfer his or her homestead into an inter vivos trust and have that property retain its homestead protections provided it meets the requirements of a “qualifying trust” such as allowing a settlor or beneficiary to unilaterally revoke the trust, exercise an inter vivos general power of appointment over the homestead property, or use and occupy of the property as the settlor’s or beneficiary’s principal residence at no cost to the settlor or beneficiary (other than payment of taxes and other specified expenses) for a permitted time period such as the life of the settlor or beneficiary. The Bankruptcy Court for the Western District of Texas in In re Cyr, 605 B.R. 784 (W.D. Tex. 2019), held that the settlors’ trust did not meet these requirements and thus the property that otherwise would have been homestead had it not been transferred to the trust was not protected when one of the settlors went bankrupt. For example, the Property Code requires that the debtor must be able to live in the home “at no cost” but the trust merely provided that they could live there “rent free and without charge” (the language used in Tax Code § 11.13(j)(3)(A)).

 

The District Court for the Western District of Texas reversed. The court explained that finding a distinction between the terms “cost” and “charge” elevated form over substance. The court explained that “[w]hat matters is whether the trust instrument expresses intent to preserve the homestead designation.” The court held that the trust language reflect this intent and that doing so is consistent with the purpose of the statute to allow a homestead to be transferred into an inter vivos trust without losing homestead protection.

 

Moral:  To avoid issues such as those in this case, a settlor should include both phrases (“at not cost” and “rent free without charge”) to eliminate any possibility of losing homestead protection.

 

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