Epic Real Estate Investing - Escaping the Debtor's Prison - Chapter 13 | 491

Episode Date: October 9, 2018

Learn how escaping the debtor’s prison is an easy task if it’s done correctly! In today’s episode, discover why Chapter 13 is becoming the new debtor’s prison and what spendthrift trusts were created for. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, Rockstar, if you have a question here for Tim that you'd like him to answer on the show, anything tax-related, anything asset protection related, go to taxhacker.com forward slash questions. Post your question there and then we'll answer it live right here on Tax Hacker Tuesday. Enjoy the show. This is Terrio Media. Did you know that up to 50% of your lifetime income will be wiped out by taxes? What if you could stop this madness? Isn't it about time you play on a level playing field with the wealthiest 1%? Now you can.

Tim Berry, attorney at law, shares here each and every week current tactics and strategies that anyone can implement to hack the tax code. Protect your assets and keep what's rightfully yours. It's time for Tax Hacker Tuesday. Tim Barry with Plan B Law.com again. Today I wanted to share with your article. The article was about is Chapter 13 becoming the... new debtors prison. Now, why was this author asking if Chapter 13 is becoming the new debtor's

prison? The reason being is that under a Chapter 13 bankruptcy, you have to agree to make payments to the bankruptcy trustee for anywhere between three to five years. And typically it's going to be for a five-year period. And really, there's no incentive for somebody to earn more. They're just kind of stuck on an endless treadmill for the next five years of their payments. In fact, the way this author put it is chapter 13 does not reward hard work or encourage anyone to attempt any more money because if they earn more money you know well let's go back to the author again why would you work overtime knowing that you'll have to give it to your creditors so there's no reason for getting ahead for having an incentive because the more you work the more your creditors are going to be paid off on the bill now sure logically

if you owe that money you should pay it back but realistically after after two years of paying creditors and thinking that you're going to get a clean start and knowing that you still have to keep on going for three years and paying your money to creditors, there's just not an incentive. Now, this article is really interesting in that it raised up another issue, and this other issue was a court case that just came down. And this was a Georgia court case. And here's what this Georgia court case came out and said.

And it was a case of Kenneth Ruford Allen. and the interesting thing about this case, and let me get the background on it. The background was that Mr. Allen filed a Chapter 13 bankruptcy. Now, during the Chapter 13 bankruptcy, his father called him up and asked Mr. Allen to talk to the father's attorney. The father was doing some estate planning. And what ultimately happened is the father established a trust for the benefit of Mr. Allen. So now he was the beneficiary of this trust while he was in bankruptcy. Well, the bankruptcy trustee got wind of this and said, hey, Mr. Allen, you never told us this trust is created.

You should have told us about this. Well, Mr. Allen comes back and says, no, under the bankruptcy code, I really don't need to because this trust isn't a part of the bankruptcy estate. And so the trustee got a little bit upset and they took him to court. And so in the bankruptcy court, the judge looked the whole thing over. and the judge basically makes the decision that no, there wasn't really a problem with dad creating a trust and dad moving dad's assets into this trust for the benefit of junior. They really didn't feel like that was a problem with it. In fact, great line here. The judge says the debtor's father was free to dispose of his property.

So the father was free to dispose of the father's property as the father saw fit. and a spin-thruff trust is a valid legal way to dispose of his property. So the big distinction here was the judge was saying, hey, if it was the kid, the guy who filed bankruptcy who is moving his assets into a trust, yeah, we'd probably have a problem. But in this case, it was the debtor's father who moved the father's assets into this trust to benefit the kid.

And in fact, the judge goes on and the judge says, the whole purpose of a spinthrift trust is to protect the beneficiary from his own improvidence. So once again, at the bankruptcy court level, the bankruptcy judge says there's no problem with dad moving his assets into a trust to benefit Junior even while Junior is inside the chapter 13. And the judge says that's the whole purpose for this. And the other interesting thing point brought up is the judge even says, this is what spinthrift trusts were created for. Spintriff trusts were created to do this sort of thing.

And in fact, the judge even brings up an old, gosh, 18-something case of Nicholas for Eaton, and he's saying, hey, this is exactly why spinthrift trusts were created. As far back as 1875, the spinthrift trust were created to protect kids, to protect people who do wrong stuff. And so what happened is the bankruptcy trustee appealed the decision. to the federal district court. And the federal district court, they looked over the whole thing,

and this was in 2010, and they basically said, you know what, we see absolutely nothing wrong with the decision of the bankruptcy court. The bankruptcy court was allowed to make that decision. In fact, because these determinations,

I conclude there is no error in the bankruptcy court's determination not to invalidate the subject trust based upon fraud. So put it into plain English, The federal court says, you know what? Bankruptcy court got it right. Dad was allowed to create a trust for the benefit of Junior, even while Junior was in bankruptcy, and the bankruptcy trustee couldn't take over those assets. Well, the bankruptcy trustee was pretty tenacious in this case.

So they lost at the bankruptcy court level. They lost at the district court level. So what's the natural response for him? Sure enough. they take it to the appellate court. So we go to the Court of Appeals for the 11th Circuit. And by the way, look at this opinion. It's double spaced and it's one page long.

After oral argument and careful consideration, we conclude the bankruptcy court did not error in denying the creditor's motion to modify his bankruptcy plan and did not abuse discretion accordingly we affirm. So in a one page written opinion, appellate court says the bankruptcy court was correct the district court was correct. We're not going to overturn those decisions.

And the only thing for it to go any further is the U.S. Supreme Court. And very doubt for the U.S. Supreme Court is going to allow this case to go further. So, very interesting case showing that if done correctly, and by the way, the key word here, guys, is done correctly. You have to do things correctly and do the proper dance steps for something like this to be effective. But if done correctly, parents can create a trust, a spin-thrift trust, a protected trust for the benefit of their kids, even while the kids are in bankruptcy, in particular a Chapter 13 bankruptcy, so now the kid isn't doomed to debtor's prison, as that article put it. And now, if the parents put the proper assets in there, future assets are growing for the benefit of the kids,

even while they're in bankruptcy and they're protected. Now, a couple points here. This is just one court case. This is a court case out of the 11th Circuit. It may or may not apply in your particular situation. If you want to find out if this does apply in your situation or if it could be helpful to you, by all means, give us a call and we'll be more than happy to talk things over with you. Once again, thank you very much for your time.

That's it for today, as we dream of a tax system that works just for you. But until then, you have Tim Berry. See you next Tuesday for another episode of Tax Hacker Tuesday. Hey, whenever you're ready to have Tim customize a tax hacker blueprint for you, a special custom blueprint just for you, go to taxhacker.com, answer a few questions about your situation. Tell Tim what you'd like to have happen. And then his team, they'll take it from there. And then he'll give you a copy of his free book, his free book all around Trump's new tax plan, specifically what the press isn't telling you. So go to taxhacker.com and we'll see right here next week, taxhacker.com.

Take care. This podcast is a part of the C-suite Radio Network. For more top business podcasts, visit c-sweetradio.com.