Mom's house as a problem

Postings on another listserv reminded me of a problem that does not often come up, but one that is potentially very serious when it does occur.

The problem arises when, as often happens, your Mom deeds her house to you and your siblings, reserving a life estate. 

Even though your Mom owns the house and can live there, you have an asset that must be disclosed.

The case that brought this to mind is that the debtor's Mom deeded the house to the debtor and three siblings.  The debtor had to file bankruptcy, but did not list the asset when he filed his case several years ago.  Recently his mother passed away, and as part of selling the house the title company did a title search and found that the debtor had filed bankruptcy, but had not listed the asset.

So, now the case must be re-opened.  To make matters worse, the trustee is now claiming that because Mom passed away, that the debtor must value his interest in the house as a full one-fourth of the value, whereas if he has listed it when he file his case several years ago the value of Mom's life estate could have been deducted.  Let's say the house was worth $100,000;  if the house had been valued when Mom was alive and had a life estate in the house, we would have deducted, say, $50,000 as the value of Mom's life estate.  The value of the debtor's interest, then would have been $10,000 ($100,000 total value - Mom's $60,000 life estate = $40,000 / 4 = $10,000).  The debtor could have protected that with his $11,975 federal wild card exemption.  If the trustee convinces the judge that the life estate should not be deducted (since Mom is deceased) the debtor's interest is $100,000 ($100,000/4= $25,000), which means that the debtor cannot protect even half of the asset.

This does not even include the truly horrific possibility that the trustee will think that the debtor was deliberately concealing the asset and seek to revoke the debtor's discharge.

So, I think the moral is:  If you are going to file, check with Mom to see if she has does any "estate planning" which will have to be taken into account in planning your bankruptcy.