You’ve worked hard. You’ve built up a nice nest egg that you hope to someday leave to your kids. Your “ducks are in a row” and you’re in good financial standing. Do you need to worry about creditors getting their hands on your money?
You just might!
This is because the money that you leave to your beneficiaries may be at risk if they have financial trouble down the road. It’s not pleasant to think about, but the inheritance you’ve worked so hard to accumulate could easily be lost if your heirs are in debt or go through a lawsuit or divorce.
Specifically, when it comes to leaving an inheritance to a child struggling with tremendous debt, the lifeline that you had hoped to provide may come with a very unexpected cost.
You see, the moment you leave cash or property to someone as an outright bequest, it becomes their property. Bill collectors will quickly learn about it and will immediately begin proceedings to get their hands on it. This means that the money that you worked hard to earn and wanted to leave to your heirs could almost immediately fall into the hands of bill collectors.
Even if your kids do not have issues now, that does not mean that they may not have issues in the future. For example, an unexpected job loss or medical emergency could force an otherwise responsible person into bankruptcy. In fact, the number one reason for bankruptcy in the U.S. is unpaid medical bills; and most of those people had medical insurance. However, when they became ill and could not work, many used loans and credit cards to keep up with mortgage and other payments and ended up needing to file bankruptcy through no fault of their own.
This is why I frequently suggest that my clients who have this concern set up a trust for the benefit of the heir rather than leaving money to them outright. The trust needs to be written with very specific language to provide protection from creditors. At the same time, the trust can be written with very liberal distribution instructions to ensure that your beneficiaries have unrestricted use of the assets or funds.
Some people mistakenly believe that if they accept an inheritance from a loved one and immediately give it away to their heirs (a.k.a. hide it) or invest it into another asset, the money is protected from the reach of creditors. Unfortunately, if you already have creditors lurking, this transfer will most likely be challenged as fraudulent. If the challenge is successful you will need to undo the transfer, which makes your inheritance available to bill collectors once again.
It is important to point out that not every trust will give you protection from creditors. You need specific language in your trust to ensure that the assets are transferred in the right way. Most trusts you create for yourself do not provide this protection.
If you have concerns about your heirs and you want to protect your hard-earned assets from bill collectors, be sure to meet with an experienced estate lawyer who can help you protect them.
If you would like to learn more about how you can make it as easy and inexpensive as possible for your family if anything were to happen to you, click here for our free workshop.