The 180-day rule applicable to life insurance proceeds also applies to death benefits overall. Death benefits may also often be exempt.
Our last two blog posts have been about inheritances and life insurance proceeds. Death benefits work the same in a Chapter 7 “straight bankruptcy” case. That is:
- depending on the timing of the death benefit, it may be property of your Chapter 7 estate; and
- if it IS property of the estate, it may be exempt.
Just like inheritances and life insurance proceeds:
- if the death benefit is NOT property of the Chapter 7 estate, it’s yours to do with whatever you want;
- if the death benefit IS property of the estate and is NOT exempt, your Chapter 7 trustee can take it from you and use those funds to pay your creditors; and
- if the death benefit IS property of the estate but IS also exempt, it’s protected from the trustee, and is yours to do with whatever you want.
So you can keep a death benefit either if it is not property of the estate or if it is exempt.
But First, What’s a Death Benefit?
A death benefit (which is not defined in the U.S. Bankruptcy Code) is also known as a survivor benefit. Like it sounds, it is money you receive as a result of another’s death. Death benefits can come from a decedent’s pension or retirement fund, IRA, Social Security, annuity, veteran’s benefit, and various other investment funds and retirement plans.
Death benefits may be paid in a lump sum or in monthly or annual payments. The funds may the entire amount the decedent was receiving or a set percentage of it. You may have a right only to a portion of the property, shared with other beneficiaries. Some death benefits can go only to certain specific relatives while others go to whomever the decedent designated.
The 180-Day Rule
The 180-day rule determines whether a death benefit is or is not property of your Chapter 7 estate. If within 180 days after you file bankruptcy you “acquire or become entitled to acquire” an “interest in property” “as a beneficiary… of a death benefit plan,” that property is “property of your bankruptcy estate.” It’s counted as if it was your property at the time you filed your case, even though it didn’t become yours until during that 180-day period. (See Section 541(a)(5)(C) of the Bankruptcy Code.)
So, if you file a Chapter 7 case and the person from whom you receive the death benefit dies within 180 days thereafter, the death benefit is property of the bankruptcy estate. It potentially can be taken by the trustee and used to pay your creditors. If the death occurs more than 180 days after filing, the death benefit is not property of the estate. It’s all yours.
Death Benefit Exemptions
Just as some life insurance proceeds are exempt, many forms of death benefits are as well. It depends on the type of death benefit, and on the exemptions applicable to your state.
For example, if you qualify to use the federal exemptions you can exempt death benefits from most types of retirement plans. (Section 522(d)(12) of the Bankruptcy Code.) And similar to life insurance proceeds, you can generally exempt your “right to receive” payments “under a stock bonus, pension, profitsharing, annuity, or similar plan or contract on account of… death… to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” (Section 522(d)(10)(E) of the Bankruptcy Code.)
Many state exemption laws have similar provisions.
CAUTION: Just because an asset would have been exempt in the hands of the decedent, it is not necessarily exempt as a death benefit for the beneficiary. This entire area is complex. Courts have disagreed on aspects such as this because the law is not always clear. This is definitely an area where you want to have an experienced bankruptcy in your corner.