Warning: Good Credit Doesn’t Mean Your Nest Egg Is Safe from Creditors Upon Your Death!

You’ve worked hard. You’ve built up a nice nest egg that you hope to someday leave to your children. 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 is not pleasant to think about, but the inheritance you have worked so hard to accumulate could easily be lost if your beneficiaries are in debt or go through a lawsuit or divorce upon your death.

Specifically, when it comes to leaving an inheritance to a child struggling with tremendous debt, or going through a divorce proceeding, the lifeline that you had hoped to provide may come with a very unexpected cost.

As a matter of fact, the moment you leave cash or property to someone as an outright bequest, it becomes their property. Creditors will quickly learn about it and will 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 beneficiaries could fall into the hands of bill collectors.

Therefore, I frequently suggest that my clients in the Williamsburg, Peninsula, and Southside areas in Virginia who have this concern set up a Legacy Trust for the benefit of the beneficiary rather than leaving money to them outright. However, 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 liberal distribution instructions to ensure that your beneficiaries have unrestricted use of the assets or funds within the trust terms.

Some people mistakenly believe that if they accept an inheritance from a loved one and immediately give it away (a.k.a. hide it) or invest it into another asset, that the money is protected from the reach of creditors. Unfortunately, if there are already creditors lurking, this transfer will most likely be challenged as fraudulent. If the challenge is successful the transfer will have to be undone, which makes your inheritance available to creditors 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, often known as living or revocable trusts, do not provide this protection. You must create the sub trust, often known as a Legacy (or inherited) Trust within it to get these protections.

If you have concerns about your beneficiaries and you want to protect your hard-earned assets from creditors or divorce for them, be sure to meet with one of our experienced estate planning lawyers who can help you protect it. Please set up an appointment at one of our offices by calling (757) 645-3176 or (866) 603-5976.