The law allows parties, prior to bankruptcy, to plan for the eventuality.  This may include the transfer of assets that would otherwise be covered by your bankruptcy and become part of the estate.  When you do this, you should be very careful not to do so in a manner that would be fraudulent.  The following is a discussion of some of the exemptions that may be utilized to protect your assets in Kansas and Missouri.  If you are in another state, these  provision may not be applicable.

A. Exemptions

1 Homestead and Home Improvements

a. The land must contain the debtor’s residence. In re Gray, 45 B.R. 437,439 (D. Kan. 1984); Peak v. Lenora State Bank, 58 Kan. 485, 489, 49 P. 613 (1897).


b. The land must be occupied and used as a residence. Belcher v. Turner, 579 F.2d 73 (lOth Cir. 1978)(only the portion of a duplex occupied as a residence can qualify for exemption); but see In re McCambry, 327 B.R. 469 (D. Kan. 2005)(occupancy is only one factor to consider in determining whether duplex qualifies as homestead).

c. Limited to one acre within an incorporated town or city, or 160 acres of farming land not within an incorporated town.

d. Parcels must be contiguous. Slafo v. Jarvis, 477 F.2d 369 (lOth Cir.), cert. denied, 414 U.S. 944 (l973); Linn County Bank v. Hopkins, 47 Kan. 580,28 P. 606 (1892)(parcels are not contiguous if they merely comer on each other); Meech v. Grigsby, 153 Kan. 784, 113 P.2d 1091 (1941)(parcel cannot be divided by alley dedicated to the public use); In re Grey, 45 B.R. 437 (D. Kan. 1984)(debtor cannot select the one-acre parcel by carving out his tract so as to impair the value of the remainder portion).

e. Federal limitations -two provisions of the Bankruptcy Reform Act of 2005 affect the homestead exemption. These provisions both apply even in optout states such as Kansas and Missouri. These provisions are:

i. 11 U.S.C. § 522(0) -this section extends the “look-back” period for determining the homestead exemption to ten years, and states that the homestead exemption shall be reduced to the extent that the value of the homestead is attributable to any property that the debtor disposed of during that ten-year period with the intent to hinder, delay, or defraud a creditor. The section only applies to the disposition of non-exempt property.

ii. Recent case law regarding 11 U.S.C. § 522(0) on August 7, 2008, the Eight Circuit decided In re Addison, 540 F.3d 805 (8th Cir. 2008), which addressed the issue of § 522(0)’s application to a case involving pre-bankruptcy transfer of nonexempt assets into an exempt homestead. In another case decided on April 11, 2008 In re Anderson, 386 B.R. 315 (2008) -the Kansas Bankruptcy Court addressed similar issues.

In re Addison, 540 F.3d 805 (8th Cir. 2008) -Addison involved pre-bankmptcy planning: shortly before he filed his petition, the debtor converted $11,500 in nonexempt funds to make a voluntary principal payment on his home mortgage. Even though the debtor’s domicile, Minnesota, is an opt-out state, the Eighth Circuit held that state homestead  exemptions are subject to 11 U.S.C. § 522(0), which reduces the amount of the state homestead exemption to the extent that the value of the exemption is attributable to nonexempt property which the debtor converted into the homestead within 10 years of filing for bankruptcy, if the conversion was made “with the intent to hinder, delay, or defraud a creditor.” In other words, debtors seeking the protection of a state homestead exemption will find that state homestead exemption limited by 11 U.S.C. § 522(0).

In deciding then what was necessary to demonstrate “the intent to hinder, delay or defraud a creditor,” the Eighth Circuit looked at cases interpreting §§ 548(a)(1) and 727(a)(2). The Court rejected the argument that § 522(0) created a new standard for determining what evidence met this standard, noting that § 522(0) merely established a 10 year look-back period within which such evidence may be considered.

The trustee sought to set aside the transfer of nonexempt property into the homestead since the transfer was made on the eve of bankruptcy. However, the Court rejected that argument. The Court noted that “It is well settled that the mere conversion of non-exempt assets into exempt assets is not in itself fraudulent” and that “a debtor’s conversion of property on the eve of bankruptcy for the express purpose of placing that property beyond the reach of creditors, without more, will not deprive the debtor of the exemption to which he otherwise would be entitled.”

The lower court had voided Addison’s transfer, noting that several of the traditional badges of fraud were present in the transfer (the transfer was made to an insider; Addison retained control of the property after the transfer; the transfer was made after Addison was sued on a personal guaranty; Addison was insolvent at the time of the transfer). However, the Eighth Circuit concluded after analyzing the traditional “Badges of Fraud” that for fraudulent intent to be found there must appear in the evidence some facts or circumstances which are extrinsic to the mere facts of conversion of non-exempt assets into exempt and which are indicative of such fraudulent purpose (emphasis added).

In other words, in the Eighth Circuit, the conversion of non-exempt assets into exempt assets (in this case, into the homestead) by itself is not probative of fraud, even if done at the penultimate moment, and any badges of fraud arising from the facts of the transfer are also not in and of themselves indicators of fraud. To that point, the Court in Addison noted that the debtor’s conversion of nonexempt property into exempt could be viewed as a transfer to an insider; that after the transfer the debtor would continue to control the property; and that a debtor converting nonexempt assets on the eve of bankruptcy is usually insolvent; and concluded that these “badges of fraud,” without more, could not support a finding of intent to defraud.

The Court did give examples of the sort of evidence which would be necessary to find fraud. Among the examples were:

1.      Conduct intentionally designed to materially mislead or deceive creditors about the debtor’s position;

2.       Use of credit to buy exempt property;

3.       Converting a very great amount of the debtor’s property (the Court noted that Addison had not transferred all of his non-exempt assets to the homestead); and

4.       The existence of conveyances for less than adequate consideration.

In re Wilmoth, 397 B.R. 915 (8th Cir. 2008) -the Court affirmed that 11 U.S.C. § 502(0) did not establish a new evidentiary standard for pre-bankruptcy homestead exemption planning, but only extended the look-back period to 10 years. The Court further held that there must be extrinsic evidence of fraud, other than the badges of fraud themselves, to support a finding of intent to defraud. Apparently this extrinsic evidence would consist of deeds such as those referenced by the court in Addison. This was precisely the point made by the Eighth Circuit in In re Montaro, 398 B.R. 688, a case which was decided on Dec. 10,2008.

In re Anderson, 386 B.R. 315 (D. Kan. 2008) -This recent Kansas case used a similar analysis in deciding what must be demonstrated to set aside a transfer under §522(0). In Anderson the Court also looked to the case law interpreting §§ 548(a) and 722(a) in determining what evidence would be necessary to demonstrate an intent to defraud under § 522(0). Anderson had paid down his mortgage obligation with non-exempt assets within a few months of filing a petition in bankruptcy. The decision in Anderson was based in its particular set of facts, and after weighing all of the evidence the Court concluded that although it was a close question, in the absence of direct evidence demonstrating fraudulent intent by a preponderance of the evidence based on the presence of the badges of fraud, it would not sustain the objection to the transfer. In reaching this decision, the Court concluded that “Substantial evidence of prebankruptcy planning to pay down a mortgage on a homestead using nonexempt assets is not sufficient [to] deny discharge, as actions to hinder, delay, or defraud creditors require something more.”

However, where Addison explicitly set forth examples of that “something more,” Anderson was reticent as to what would constitute evidence of intent to defraud. The Court did reference the “Badges of Fraud” analyses under both §§ 548(a) and 722(a), but repeated that “Substantial evidence of pre-bankruptcy planning to pay down a mortgage on a homestead using nonexempt assets is not sufficient [to] deny discharge, as actions to hinder, delay, or defraud creditors require something more” (italics added). In Anderson, that “something more” could be found in the facts and circumstances of the transfer itself; unlike the Eighth Circuit’s decision in Addison, in which the Court determined hat the “something more” to demonstrate an intent to defraud must be found in circumstances extrinsic to the transfer.


Finally, it is important to note that both Addison and Anderson were cases interpreting 11 U.S.C. § 522(0) in the context of the pre-bankruptcy conversion of nonexempt assets into an exempt homestead asset. Efforts to extend the reasoning and conclusions of Addison and Anderson into other areas of bankruptcy law should be cautiously and thoroughly articulated.

111. 11 U.S.C. § 522(p) -this section restricts any homestead acquired within 1,215 days (three-and-a-half years) of filing the petition to $136,875 (this amount is adjusted every three years to reflect the cost-of living). Rollover equity from the disposition of a prior homestead put in a new homestead acquired within the time limit is exempted, provided that both homesteads are located in the same state.

2.  Household Goods

a. Must be “reasonably necessary” to maintain debtor’s customary standard of living.

b. Must be in person’s present possession. In re Ferguson, 67 B.R. 246

(D. Kan. 1986) (goods repossessed by creditor holding a nonpossessory, non purchase money security interest were not considered to be in the debtor’s present possession, and thus were not exempt).

c. Must be at the principal residence.

d. Must be owned for at least one year.

e. There is no monetary limit on the exemption. In re Noland, 13 B.R. 766 (D. Kan. 1981); Nohinek v. Logsdon, 6 Kan.App.2d 342, 628’P.2d 257 (1981).

3.  Tools of the Trade KS.A. § 60-2304(5):

a. Exemption is limited in amount to $7,500.00.

b. Tool must be reasonably necessary, convenient, or suitable for the production of work (need not be indispensable). In re Frierson, 15 B.R. 157 (D. Kan. 1981); In re Currie, 34 B.R. 745 (D. Kan. 1983). Tool must also be tangible means of production. In re Lampe, 278 B.R. 205 (1OID Cir. 2002); In re Kobs, 163 368 (D. Kan. 1994).

Exemption only pertains to debtor’s principal business, In re Oetinger, 49 B.R. 41 (D. Kan. 1985); In re Meclifessel, 67 B.R. 277 (D. Kan. 1986).

d. Does not include automobiles unless the debtor’s business is uniquely dependent on the auto. In re Meaney, 35 B.R. 3 (D. Kan. 1982); In re Currie, 34 B.R. 745 (D. Kan. 1983); In re Bondank, 130 B.R. 586 (D. Kan. 1991) (held vehicle used by debtor in his business as real estate appraiser, to travel to and from properties appraised, was not exempt as tool of trade).

e. Where one spouse is employed and the other is not, both spouses are entitled to the tool of trade exemption. In re Currie, 34 B.R. 745, 748 (D. Kan. 1983).

f. Cattle are usually exempt. See In re Heape, 886 F.2d 280 (loth Cir. 1989).

4.  Pensions and Qualified Retirement Plans

a. Any money or interest in a qualified plan under sections 401 (a), 403(a), 403(b), 408, or 409 of the Internal Revenue Code are exempt and treated as spendthrift trusts. K.S.A. § 60-2308(b).

b. Proceeds must have been received within three months of the issuance of an execution, attachment, or a garnishment, and must be necessary for the support of debtor or debtor’s family in order to be exempt.

c. IRA’s are exempt under K.S.A. § 60-2308(b). They are exempt under federal law to the amount of $1,000,000.00.

d. Exemption does not apply to execution for past-due maintenance owed former spouse. In re Marriage of Schoneman, 13 Kan.App.2d 536, 775 P.2d 194 (1989).

5.  Life Insurance

a. The nonforfeiture value of the policy shall not be exempt from: (a) the claims of creditors of a policyholder who files for bankruptcy within one year after the date the policy was issued and (b) claims of creditors of a policyholder if execution on judgment for the claim is issued on or within one year after the date the policy is issued. K.S.A. 40-414. Creditors must also show that the conversion of property into a life insurance policy as fraudulent. The badges of fraud which are considered in determining whether the conversion of property into a life insurance policy is fraudulent include:

i. Whether there was a fair consideration paid for the life insurance policies;

ii. Whether the debtor was solvent or insolvent as a result of the transfer or whether he was insolvent at the time of the transfer;

iii. The amount of the policy;

iv. Whether the debtor intended, in good faith, to provide by moderate premiums some protection to those he has a duty to support;

v. The length of time between the purchasing of a life insurance policy and the filing of the bankruptcy;

vi. The amount of non-exempt property which the debtor had after purchasing the life insurance policy; and

vii. The debtor’s failure to produce available evidence and to testify with significant preciseness as to the pertinent details of his activities shortly before filing the bankruptcy petition. In re Mueller, 71 B.R. 165, 168 (D. Kan. 1987).

b. If a debtor “re-issues” term insurance policies into universal life policies, the “conversion” does not relate back to the original date the term policies were issued. The conversion of the policy merits a re-setting of the one year period preceding the debtor’s filing for bankruptcy. People’s State Bank & Trust Co. v. Sayler, 68 B.R. 111 (D. Kan. 1986), rev’d, 98 B.R. 536 (D. Kan. 1988), aff’d, 98 542 (D. Kan. 1989).

It is unclear in Kansas how much money the debtor can put into a policy within one year of bankruptcy if the policy was purchased more than one year before. In In re Beckman, 104 B.R. 866 (S.D. Ohio 1989), the court found fraud where, three days before bankruptcy, the debtor invested an additional $200,000.00 into a life insurance policy that had existed for more than a year before the petition. The court reasoned that this went far beyond “providing in good faith … by moderate premiums some protection to those to whom … [debtors] had a duty to support.”

Once the insurance policy is cashed, it loses its exempt status. Emmert v. Schmidt, 65 Kan. 31 (1902); Independence Savings & Loan Association v. Sellars, 149 Kan. 652 (1939). The same is true if the policy is payable to the debtor as beneficiary. In re Douglas, 59 B.R. 836 (D. Kan. 1986),

B. Gifts

1 General Rule

a. $1,000,000.00 maximum exemption from gift tax.

b. $13,000.00 exclusion from donor’s annual gifts.

c. Tuition and medical payments excluded from donor’s annual gifts.

2 Gifts to Spouse

a. If donee spouse is U.S. citizen, the gift is excluded from the donor’s annual taxable gifts.

b. If donee spouse is not a U.S. citizen, there is no marital exclusion. However, the donor’s annual gift tax exclusion under IRC § 2503(b) with respect to the alien spouse is increased to $100,000.00.

3 Gifts to Children and Grandchildren

a. Gifts made to children and grandchildren are treated like gifts made to third parties. The $1,000,000.00 maximum exemption, and the $13,000.00 annual exclusion apply to the donor for gift tax purposes.

b. Gifts made within the debtor’s family are scrutinized more closely by courts. In order to avoid accusations that the transfer was fraudulent, the donor should establish a long-time pattern of giving.

c. When making a gift, select assets that the transferor does not intend to continue using. Transfer of possessions to the children that the parent continues to use, such as antiques, automobiles and home furnishings, may constitute continuing concealment and may result in a denial of discharge on the basis of fraud. In re Sanders, 128 B.R. 963 (W.D. La. 1991).


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