Focused On Your Family’s Legacy

Can you protect an inheritance from bankruptcy?

On Behalf of | Jun 26, 2023 | Estate Planning

As you do your estate planning, you may find yourself rather worried about one of your heirs. Their financial situation is not very stable. Maybe they have a lot of overwhelming debt or they tend to make poor financial choices. You’re worried that your inheritance is simply going to be taken by creditors. Eventually, maybe you think that your heir is going to have to declare bankruptcy.

This puts you in a strange position. You may be tempted not to leave your heir anything, not wanting to give your money to their creditors. But you also don’t want to disinherit this person, and you understand that they could really use the money since they are in such a difficult financial position. What options do you have?

Consider an irrevocable trust

One potential tactic is to use an irrevocable trust. The trust is the owner of the money and assets that you put into it. The trustee can then authorize distributions to your heir. Your heir will not own the money until it is distributed. So, if they declare bankruptcy, the money in that trust is not an asset they have to worry about losing. If creditors come after them for unpaid debts, the creditors can’t access the money that is in that trust. They can only access the assets that your heir owns. The trust structure will provide an extra level of separation in this regard.

Creating a thoughtful estate plan

As you can see, it’s important to really consider all of your options to create an estate plan that works for your family and their specific, unique needs. For some people, simply putting money into a will and leaving it to their heirs is quick and easy, and the approach works fine for their needs. But don’t assume that this approach is going to work for everyone. In the example listed above, you can see why it’s important to use different tactics to achieve your goals. Seeking legal guidance is a good place to start.