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Trust Law/Level VI · Protection/6.3 Fraud, ethics and limits/Lesson 4

Bankruptcy and the ten-year reach-back

What becomes part of a US bankruptcy estate, why spendthrift trusts and ERISA plans usually stay out, how §548(e) reaches self-settled trusts for 10 years, and how the Code caps some homestead exemptions.

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. Use ERISA plans and IRAs: plans stay out of the estate (Patterson v. Shumate, 1992) and IRAs are exempt up to $1,711,975 for cases from 1 April 2025, rollovers, SEPs and SIMPLEs uncapped. Catch: inherited IRAs are not exempt federally (Clark v. Rameker, 2014).
  2. A beneficiary’s interest in a third-party spendthrift trust stays out of the estate under §541(c)(2), costing the beneficiary nothing. Catch: a self-settled trust’s restriction is generally unenforceable, and §548(e) reaches actual-intent transfers into one for 10 years.
  3. Claim a generous state homestead where you have long lived, but interest acquired within 1,215 days before filing is capped at $214,000 (§522(p), cases from 1 April 2025). Catch: exemptions follow your 730-day domicile (§522(b)(3)(A)).
  4. Tenancy-by-the-entirety property is exempt in bankruptcy to the extent state law shields it from one spouse’s creditors (§522(b)(3)(B)). Catch: joint creditors still reach it, and a federal tax lien attached to such an interest in United States v. Craft (2002).
  5. Where your state allows the choice, compare the federal list (homestead $31,575 for cases from 1 April 2025, §522(d)(1)) with the state list and take the better one. Catch: states that opted out require their own exemptions.

MaterialsThe text of 11 U.S.C. §§522, 541 and 548, free on law.cornell.eduThe Supreme Court’s opinion in Patterson v. Shumate, 504 U.S. 753 (1992)The Judicial Conference notice of bankruptcy dollar amounts effective 1 April 2025, for the current §522(p) figure

Wonder

  1. Why does a beneficiary’s interest in some trusts stay out of the bankruptcy estate?
  2. How can a bankruptcy trustee undo a transfer made almost 10 years before the filing?
  3. Why does the Bankruptcy Code limit homestead exemptions for recently acquired home equity?

Explore

  1. When a person files for bankruptcy under Title 11 of the US Code, a bankruptcy estate is created. Under 11 U.S.C. §541(a), it includes, with listed exceptions, all legal or equitable interests of the debtor in property as of the filing. In Chapter 7, a trustee collects and sells non-exempt estate property to pay creditors. The debtor may claim exempt property under §522, using the federal exemptions or the state’s, unless the state has opted out of the federal list. So for any trust interest, two questions matter: is it estate property at all, and if so, is it exempt?
  2. Section 541(c)(2) keeps many beneficiary interests out: ‘A restriction on the transfer of a beneficial interest of the debtor in a trust that is enforceable under applicable nonbankruptcy law is enforceable’ in bankruptcy. A beneficiary’s interest in a spendthrift trust created by someone else, valid under state law, therefore generally stays outside the estate (lesson 4.3.2). In Patterson v. Shumate, 504 U.S. 753 (1992), the Supreme Court held that ‘applicable nonbankruptcy law’ is not limited to state spendthrift trust law but includes federal law, so the anti-alienation provision of an ERISA-qualified pension plan also keeps the debtor’s interest out of the estate.
  3. Self-settled trusts are different. In states without a domestic asset protection statute, a spendthrift clause generally does not protect a settlor from their own creditors (for example UTC §505), so the restriction is not enforceable under applicable nonbankruptcy law and the settlor’s interest can come into the estate. Where a DAPT statute applies, the trustee may still attack the funding. Under §548(e), added by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the trustee may avoid a transfer by the debtor to a self-settled trust or similar device of which the debtor is a beneficiary, made within 10 years before the filing, if made with actual intent to hinder, delay or defraud a present or future creditor.
  4. Section 548(e) works alongside the general rules. Under §548(a)(1), the trustee may avoid transfers made within 2 years before the filing for actual intent or, on constructive grounds, for less than reasonably equivalent value while insolvent or in similar distress. Under §544(b), the trustee may use state voidable-transfer law, such as the UVTA’s generally 4-year periods (lesson 6.3.1). The 10-year period of §548(e) requires actual intent, shown in practice through circumstances such as the badges of fraud (lesson 6.3.2); lack of value or insolvency alone is not enough.
  5. BAPCPA also limited homestead exemptions. Under §522(p), a debtor who claims state exemptions may not exempt more than a capped amount of interest in a homestead acquired during the 1,215 days (about 3 years and 4 months) before filing. The cap began at $125,000 in 2005 and is adjusted for inflation every three years under §104; for cases filed on or after 1 April 2025 it is $214,000. Interest carried over from a previous principal residence in the same state, acquired before that period, does not count, and family farmers are excepted. §522(q) applies the same cap where, for example, the debtor owes debts from certain securities-law violations or from criminal acts or misconduct causing serious injury or death.
  6. Two further rules address moves made shortly before bankruptcy. Under §522(o), a homestead exemption is reduced by value added to the home in the 10 years before filing from non-exempt property the debtor disposed of with intent to hinder, delay or defraud a creditor. Under §522(b)(3)(A), a debtor claims the exemptions of the state where they were domiciled for the 730 days before filing; if they moved within that time, they use the state where they were domiciled for the 180 days before that period, or for the longer part of it. This lesson describes how the Bankruptcy Code treats trusts and homesteads; it does not suggest how to arrange property before a filing.

Key facts

  • Under 11 U.S.C. §541(a), the bankruptcy estate includes, with listed exceptions, all legal or equitable interests of the debtor in property as of the filing.
  • Under §541(c)(2), a transfer restriction on a trust interest that is enforceable under applicable nonbankruptcy law keeps that interest out of the estate.
  • Patterson v. Shumate (1992) held that ‘applicable nonbankruptcy law’ includes federal law, so interests in ERISA-qualified plans are excluded.
  • Under §548(e) (2005), a trustee may avoid transfers to a self-settled trust made within 10 years with actual intent to hinder, delay or defraud.
  • §522(p) caps the homestead exemption for interest acquired within 1,215 days before filing: $214,000 for cases filed on or after 1 April 2025.
  • Under §522(b)(3)(A), state exemptions generally follow the debtor’s domicile for the 730 days before filing.

Exercise nine, six, three, one

9CollectList up to 9 facts about the debtor in a bankruptcy decision or case study you are reading about (some have fewer), such as trusts they created or benefit from, retirement plans, their home and when it was bought, recent moves and transfers in the years before filing.
6ClusterSort them into 6 categories: trust interests created by others, self-settled trusts, retirement plans, the homestead, residence and domicile, and transfers before filing.
3DistillReduce the 6 categories to 3 groups: facts about what enters the estate, facts about exemptions and caps, and facts about transfers a trustee might challenge.
1CrystallizeWrite 1 sentence explaining, in your own words, why a spendthrift trust created by someone else is treated differently in bankruptcy from a trust debtors create for themselves.

Fact check

Dates, figures and claims checked against the published sources listed below.

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