Suppose the following: Title to a home is held by Trust A. The beneficiaries of Trust A are three natural persons and Trust B. Trust B holds a 25% beneficial interest in Trust A. The sole beneficiaries of Trust B are Mom and Dad, who occupy the home as a principal residence. None of the three natural person beneficiaries of Trust A (the kids) occupies or intends to occupy the home as a principal residence. No valid declaration of homestead has been recorded. Is homestead protection afforded the beneficiaries of Trust B? If so, what is the amount of the exemption? Bankruptcy Court says Mom and Dad have an aggregate homestead exemption in the amount of $31,250 (25% of the automatic homestead amount of $125,000). In re: VanBuskirk, Joseph C., et al., United States Bankruptcy Court, District of Massachusetts, Central Division, Chapter 7 Case No. 13-41947-MSH (Lawyers Weekly No. 04-036-14), Memorandum of Decision on the Trustee’s Objection to Exemption (May 20, 2014).
The current homestead statute, M.G.L.c. 188, referred to by the Court as “a statute of teeth-cracking complexity”, became effective in 2011. Among other things, it creates the automatic exemption of $125,000 and extends homestead protection to certain trust beneficiaries. The Court saw no indication in the statute of an intent to limit homestead protection to beneficiaries of a trust that holds title to the home and exclude from homestead protection people who are beneficiaries of a trust that itself is a beneficiary of the trust that holds title to the home. Rather the Court found in the statute a suggestion to the contrary. Furthermore, public policy encourages a liberal interpretation of the homestead statute.
Why only $31,250 instead of $125,000? As the kids did not occupy or intend to occupy the home as a principal residence, they had no right to claim a homestead estate in the home. Nevertheless they were part owners, and the statute allocates the automatic homestead exemption among all trust beneficiary owners in proportion to their respective ownership interests, not on the basis of occupancy of the home. Allocation is one thing. The right to assert the exemption is another. And so the allocations to the three kids, aggregating $93,750 of the $125,000 automatic homestead amount, “remain unused and unavailable.” They do not “spill over” to augment Mom and Dad’s allocation.
If, after the current version of the homestead statute became effective, Mom and Dad each had declared a homestead for elderly or disabled persons pursuant to Section 2 of Chapter 188 (assuming they were each at least 62 years of age or disabled within the meaning of Chapter 188), each of Mom and Dad would have been entitled to an exemption of $500,000. There is no reduction, proration or allocation among other owners of the home of the exemption to which each elderly or disabled owner is entitled pursuant to Section 2.
There would appear to be no reason why the result in VanBuskirk would have been any different if the downstream trust had been more than one step away from the title holding trust. For example, had Mom and Dad been the sole beneficiaries of a third trust that was itself the sole beneficiary of Trust B, presumably the result would have been the same.
Further, there would appear to be no reason why the “no spill-over” rule would not apply to homestead declarations made by trust beneficiaries or tenants in common pursuant to Section 3 of Chapter 188 (the “regular” homestead exemption). If a Section 3 homestead had been declared for each of Mom and Dad, presumably Mom and Dad would have been found entitled to an aggregate homestead exemption of $125,000 (25% of $500,000), based on their aggregate percentage ownership interest.
A final note: A bankruptcy court’s interpretation of a state statute is a prediction of how the statute would be interpreted by the state’s highest court. The bankruptcy court’s interpretation is not binding on the state’s courts, but is likely to be persuasive.