Although an inheritance is a gift intended specifically for a person, it is also a source of cash a creditor may try to take if you owe a debt. Generally, when you receive an inheritance, you get outright ownership of the decedent’s former assets, which can be used to pay off liabilities. Whether the creditor can compel you to pay your debts from your inheritance depends on several factors, and this is where an experienced estate planning lawyer can be invaluable.
If you received a cash inheritance, the court may order the bank account levied, which would allow the creditor to take the funds in the bank account to settle the debt. If the inheritance is real estate, the creditor may place a lien on the property. A properly executed and recorded lien gives the creditor the ability to take the owed debt from any proceeds of the sale of property. In some circumstances, a lien can force you to sell the land to settle the debt.
Some inherited real estate is protected from liens via a Homestead Exemption. If you live in the inherited property, and the equity in the home is less than the amount owed to the creditor, the court cannot force the sale of the house. So assume your house is worth $250,000, but you still have a $200,000 mortgage to pay off. If you owe a creditor more than $50,000, they cannot force the sale of the property to satisfy the debt.
Disclaiming the Inheritance
One tactic is to “disclaim” the inherited property. By disclaiming, you surrender all rights to the inheritance, which is then transferred to the next beneficiary in line.
Inheritance Protection Trusts
If your inheritance is conveyed to you via a spendthrift trust, it is protected from claims by your creditors. Inheritance protection trusts are varied, but are usually set up as a spendthrift trust. A trust is a separate legal entity that holds property for the benefit of certain individuals, called beneficiaries. The terms of the spendthrift trust regulates when the property is distributed and that is why it is protected from creditors. Note however that when the trust makes a distribution to you, your creditors can take what you receive, if the creditor has a court order.
Typically the addition of one or more inheritance protection trusts to a will or living trust will raise the fee for preparation of the estate plan, but the benefits are obvious. An estate planning attorney is usually necessary to set up an inheritance protection trust because without the appropriate “buzz” words and legal language, in some states, the trust fund will lose its asset-protected status.
What Should You Do?
If you are in the process of putting together your estate plan, you will need to let your estate planning lawyer know up front that asset protection for your beneficiaries should be built directly into your plan.
If you already have an estate plan but have not considered all of the benefits of protecting your beneficiaries, then you will need to sit down with your estate planning attorney to revise and update your current estate plan to include asset protection through discretionary lifetime trusts.
Contact the experienced estate planning lawyers at The Law Offices of Christopher B Johnson today.