John Carroll v. Joji Takada, 864 F.3d 512

Henry and Mary Anna Miskowicz settled an inter vivos trust in 1993 holding real estate, with a spendthrift clause and a distribution clause dividing the residuum equally among their three children at the surviving spouse’s death.
The trust directed distribution at the surviving spouse’s death; shares of children who did not survive the spouse by 60 days would pass to their successors. The trustee could defer distribution for up to six months, but the instrument stated beneficiary rights would vest as of the time prescribed absent the deferral paragraph.
Henry died in July 2012. Catherine Carroll (one of the children) survived him and, 60 days after his death, her one‑third interest in the trust fully vested.
Catherine and her husband filed a Chapter 7 petition in February 2013 and claimed a $30,000 exemption for Catherine’s trust interest under 11 U.S.C. § 522.
The bankruptcy trustee objected, arguing Catherine’s interest was vested and therefore not protected by the spendthrift clause or excluded from the bankruptcy estate. The bankruptcy court sustained the objection; the district court affirmed.

Issue	Carrolls' Argument	Trustee's Argument	Held
Whether Catherine’s interest in the spendthrift trust was excluded from the bankruptcy estate under § 541(c)(2)	Spendthrift clause shields Catherine’s interest from creditors and thus from the bankruptcy estate	Catherine’s interest vested upon satisfaction of the 60‑day survival condition and became alienable, so it was part of the bankruptcy estate	The trust language vested Catherine’s one‑third share upon the 60‑day survival period; the interest was alienable and part of the bankruptcy estate, so exemption was properly disallowed

Fowler v. Shadel, 400 F.3d 1016 (7th Cir.) (standard of de novo review for entitlement to keep property in bankruptcy)
In re Baker, 114 F.3d 636 (7th Cir.) (§ 541(c)(2) excludes from the estate trust interests limited by applicable nonbankruptcy law)
Rousey v. Jacoway, 544 U.S. 320 (Sup. Ct.) (distinguishing exemptions under § 522 from property exclusions under § 541)
Owen v. Owen, 500 U.S. 305 (Sup. Ct.) (no property may be exempted unless it first falls within the bankruptcy estate)
In re Sharp, 860 N.E.2d 539 (Ill. App. Ct.) (Illinois spendthrift protection ends when trust property is distributed and becomes alienable)