District Court Overturns Bankruptcy Court’s Living Trust Decision

A recent decision by the U.S. District Court for the Northern District of Illinois has overturned a bankruptcy court in a case involving the estate of Linda Castellano.  The District Court has decided that the Bankruptcy court improperly held that a Living Trust created by Linda could be reverted back to her bankruptcy estate at her death and be subject to the claims of creditors.  The Court held that under Bankruptcy Code section 541(c)(2) the living trust was excluded from Linda’s estate.  The Trust did not terminate at Linda’s death “but continued to live a vibrant existence even as of the time that Linda commenced her bankruptcy case.” 

A lot of problems would have been created with living trusts if the District Court would have upheld the Bankruptcy Court’s judgment.  The original ruling was overly expansive and could have caused almost all living trusts to be set aside as “self-settled trusts.”   This decision creates more certainty in the interpretation of section 541(c)(2), a section which is still open to much interpretation. 

See Jay Adkisson, Estate Planning Bar Breathes Sigh Of Relief As Castellano Gets Turned Around, Forbes, May 25, 2015.

Special thanks to Jim Hillhouse for bringing this article to my attention.