Opinion
Case No. 08-29655-svk.
December 30, 2008
Decision and Order Sustaining Trustee's Objection to Amended Exemptions
George and Ellen Demolas (the "Debtors") filed this Chapter 7 case on September 4, 2008. On November 14, 2008, they filed amended exemptions, and each of them claimed an exemption in an inheritance Ellen received from her deceased mother's estate on approximately November 4, 2008. Specifically, the Debtors' amended Schedule C and the Final Account Statement from the Probate Estate reflect $22,902.35 in inheritance proceeds, and George and Ellen each claimed a $7,192.40 exemption in these proceeds under Bankruptcy Code § 522(d)(5).
The Trustee objected to George's claimed exemption in the inherited property. The Trustee argues that the inheritance is Ellen's individual property under Wisconsin law, and that George may not claim an exemption in his wife's individual property. The Trustee concedes that Ellen may claim her $7,192.40 exemption in the proceeds, but because the proceeds are Ellen's individual property, the Trustee's position is that George may not claim an exemption in them.
The Court held a hearing on the Trustee's Objection on December 10, 2008. At the hearing, the Debtors argued that although an inheritance given to one spouse is considered individual property under Wis. Stat. § 766.31(7)(a), the income from the distribution is marital property pursuant to §§ 766.01(10) and 766.31(4) of the Wisconsin Statutes. The Schedule K-1 to IRS Form 1040 shows that income passed through the estate to Ellen, and the Debtors contend that the income portion of the inheritance should be characterized as marital property because Wis. Stat. § 766.01(10) includes distributions from trusts and estates in the definition of income. On the other hand, the Trustee argued that the distribution is Ellen's individual property. He acknowledged that the inheritance had tax implications for George, but argued that the taxable nature of the proceeds did not serve to convert the proceeds to marital income. At the conclusion of the hearing, the Court took the matter under advisement to consider whether the inheritance distribution constituted marital income, or whether the distribution is Ellen's individual property.
This dispute focuses on §§ 766.31(4) and (7)(a) of the Wisconsin Statutes. Section 766.31(4) states:
Except as provided under subs. (7)(a), (7p) and (10), income earned or accrued by a spouse or attributable to property of a spouse during marriage and after the determination date is marital property.
Section 766.31(7) provides:
Property acquired by a spouse during marriage and after the determination date is individual property if acquired by any of the following means:
(a) By gift during lifetime or by a disposition at death by a 3rd person to that spouse and not to both spouses. A distribution of principal or income from a trust created by a 3rd person to one spouse is the individual property of that spouse unless the trust provides otherwise.
Read together, these sections characterize the income from a distribution from a probate estate to one spouse as the individual property of the inheriting spouse. Although the Debtors are correct that Wis. Stat. § 766.01(10) broadly defines income and includes "income distributed from trusts and estates," Wis. Stat. § 766.31(7) specifically characterizes the income distribution from the estate of a third party to one spouse as individual property, rather than marital property. Since there is no evidence that the inheritance was bequeathed to George and Ellen, under Wisconsin law, the inheritance is Ellen's individual property.
The Debtors primary argument is that because the inherited funds are subject to taxation, they constitute income that should be characterized as marital property under Wisconsin law. The Debtors cite no case in support of this proposition, and the Court's research of Wisconsin law yielded no support for the Debtors' argument. On the contrary, several cases hold that an inheritance is individual property. See, e.g., Gerczak v. Estate of Gerczak, 285 Wis. 2d 397 (Wis.Ct.App. 2005) (property inherited by one spouse remains property of the individual spouse); Rinehart v. Meek (In re Grady), 128 B.R. 462 (Bankr. E.D. Wis. 1991) (gifted or inherited property is an exception to the rule that all property acquired after the determination date is marital property). It is also true that distributions from an estate may be taxable to a beneficiary. E.g., In re Schweitzer, 307 Wis. 2d 298 (Wis.Ct.App. 2007). But the Court can find no authority for the position that because a distribution of property from an estate is taxable, that status somehow overcomes the statutory mandate of Wis. Stats. §§ 766.31(4) and (7) providing that the income inherited by one spouse is individual property.
The Court finds that the inheritance is Ellen's individual property under Wisconsin law, and George does not have an interest in the property. It is a "fundamental tenet" of bankruptcy law that "a debtor must have an ownership interest in property before he can claim an exemption in it." In re Horstman, 276 B.R. 80 (Bankr. E.D.N.C. 2002) (citing cases); see also In re Czerneski, 330 B.R. 240 (Bankr. E.D. Wis. 2005) (under Wisconsin marital property law, husband could not claim exemption in property gifted to wife individually). As a result, because George has no property interest in the inherited funds, he may not apply his exemption to those funds.
Although the Court sustains the Trustee's Objection to George's claim of exemption, Ellen Demolas may apply her $7,192.40 exemption under Code § 522(d)(5) to the $22,902.35 inheritance proceeds, leaving $15,709.95 in non-exempt property. Assuming Ellen has exhausted all of her exemption rights, the sum of $15,709.95 should be turned over to the Trustee.
IT IS THEREFORE ORDERED: that the Trustee's Objection to George Demolas's amended claim of exemptions is sustained.
IT IS FURTHER ORDERED: that, unless Ellen Demolas amends her exemptions to increase the exemption in the inheritance, she shall turn over to the Trustee the sum of $15,709.95 within ten days of the date of this Order.