How much of your estate do you want to give to your kids’ bankruptcy trustee when you die? You may be saying to yourself, “Why in the world would I want to give any of my estate to my kids’ bankruptcy trustee? That’s a nonsense question!” Is it?
Here’s a true story. A couple – we’ll call them George and Mary Sample – had been experiencing financial difficulties, and reached the difficult decision to file bankruptcy to get some relief from their creditors. A couple of months after the Samples filed for bankruptcy, Mary’s mother (we’ll call her Janet) died. Mary was the sole beneficiary of Janet’s estate and, in light of their family financial problems, they needed the money from Janet’s estate to help them get a fresh start.
Soon after Janet’s death, the probate court, at Mary’s request, appointed her as the personal representative of Janet’s probate estate, which gave her the legal authority to sell Janet’s home. Mary listed Janet’s home for sale, and soon had it under contract. When the title company handling the closing prepared its title report, it noted that George and Mary had filed bankruptcy, and alerted the Sample’s bankruptcy trustee. The bankruptcy trustee agreed that the title company could go ahead and close the sale as long as the money from the sale of the home was paid to the trustee for the benefit of the Samples’ creditors.
Why did that happen? There’s a bankruptcy law that says if you die less than six months after one of your children files for bankruptcy, and the child is entitled to receive some or all of your estate as an outright gift, the bankruptcy trustee gets it! Not the result expected by either the parent or the child.
The good news is that you can avoid this result by leaving your kids’ inheritance to them in a trust. A well-drafted trust would provide for your kids’ inheritance to be held and used for their benefit, subject to the control of either a co-trustee or an independent trustee. The key is that by giving your assets to your kids in a trust, they don’t own them and they can’t be taken to satisfy their debts (with some exceptions for child support in some jurisdictions). The bonus benefit is that this kind of a plan doesn’t just protect property from bankruptcy trustees – it protects from other creditors and predators, and from divorce!
In the story above, Janet could have avoided the result by creating a plan that left her kids’ inheritance to them in trust. With appropriate controls, George and Mary could have benefitted from the sale of the house!
Experienced estate planning attorneys will talk with you about how you leave your assets to your kids, and help you understand the benefits of leaving your property to them in trust. Even if your kids’ bankruptcy attorney tells them about the risk of losing their inheritance to a bankruptcy trustee, the kids aren’t going to think your death is imminent (unless you have a terminal diagnosis you’ve shared with them), and won’t come to you to talk about it because they’re already embarrassed about their financial situation. Don’t leave it up to your kids to figure that out and try to get you to do something about it.
Most people underestimate the value of asset protection planning for their beneficiaries because they really think “that won’t happen to me or my kids”. Create an estate plan that doesn’t leave the door open for un-intended beneficiaries like the bankruptcy trustee. Proactively plan to anticipate these kinds of situations and protect your inheritance for the benefit of your kids. If the unthinkable does happen, they will appreciate it! As an experienced estate planning attorney, I can help!
Don’t let your family get caught by surprise and lose your hard earned inheritance to creditors. Call me today @ (801) 263-0132 before the unexpected happens!
Our mission is to help people find peace of mind about the future by designing and implementing estate plans that work!