Disclaimer of Inheritance: Not a Fraudulent Transfer Under Section 548, but….

Imagine 5 months before debtor files bankruptcy, she was notified that her late grandmother left her a mansion in Beverly Hills and $50,000 in life insurance proceeds.  Debtor, who was concerned that her creditors would snatch up the assets, instead decided to disclaim her interest in this inheritance — meaning she waived her right to receive the inheritance.  It is common sense that nobody can be forced to accept something if they do not choose to and the transfer of title to the property does not vest in the person until the recipient accepts it.

Under California’s Probate Code, a beneficiary to an inheritance may disclaim any property interest as long as they file the disclaimer in accordance with the Probate statute (i.e. sign it, identify who is seeking to transfer you the asset (grandma) and voluntarily disclaim the asset).  Debtor has now “transferred” her right to inheritance to another person before filing bankruptcy.   Is this a prepetition fraudulent transfer that is voidable by the trustee under Uniform Voidable Transaction Act?

No, it’s not.

In the 9th Circuit’s case of Costas, the debtor’s prepetition disclaimer divested the debtor of a property interest and therefore the trustee could not avoid it.  The court held, “…a properly executed disclaimer does not qualify as a ‘transfer of an interest of property’ for purposes of Section 548.”   However, there is another 9th Circuit case called Bensal, which held that the transfer can be avoidable under the Federal Debt Collection Practices Act (FDCPA).   The FDCPA has a provision focusing on the United States as a creditor.  So, the Chapter 7 trustee may step in the shoes of the U.S. if they are an unsecured creditor in the debtor’s case, via Section 544(b), and thereby avoid the disclaimer that way.

Sevan Gorginian, Esq.

Law Office of Sevan Gorginian

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