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Can creditors take an inheritance?

On Behalf of | Jul 7, 2022 | Estate Planning |

One of your heirs has a substantial amount of debt. You know they’ve had financial problems in the past, and perhaps they struggle to hold down a job. Creditors have been calling, but there’s no way for them to pay.

You’re making your estate plan, and you’re worried that leaving an inheritance to your heir just means you’ll pay off the debt. As soon as you give your heir that money, the creditors will claim that they need it, and it’s all going to be taken. Maybe it’s not even enough to pay off the entire debt, so your heir is just going to lose 100% of their inheritance very quickly.

You clearly don’t want this to happen, as your goal isn’t to pay off another credit card company or cover a car loan. What can you do to keep the money from the creditors?

Put the money in a trust

One way to address this is to put the money into a trust. Don’t give it directly to your heir, as that opens it up for the creditors to take it. If you put it in the trust, the creditors can’t access it because it is technically not owned by your heir.

The key is ensuring you use the correct type of trust. For instance, revocable trusts can often still be accessed by creditors, while irrevocable trusts usually can’t. Some people use these to move money around while they’re still alive, and others use them the way that you are thinking about — as a tool to pass assets down to the next generation.

No matter what you’d like to do, you need to know what legal steps to take.