If you have debts like many Americans, you may benefit from an estate plan that helps you protect assets from creditors. While it is difficult to fully shield all assets from creditors during your lifetime, a suitable estate plan could save your estate money in the long run.
How Could Creditors Access Your Estate Assets?
The most common way that creditors access assets in a debtor’s estate is by making claims during the probate process. When an estate is probated, the executor must issue notices to inform creditors of the debtor’s death and the opening of probate. Creditors then have the option of making a claim to attempt to recover the debts. Anyone who makes a creditor claim has priority in getting paid before inheriting relatives would. If an estate does not contain enough money to pay both creditors and relatives, then the relatives receive nothing. If there is not enough money to pay all creditors, then the debts get paid off in part.
As you can see, the probate process is not ideal for people with significant debts. Their estates could get reduced by creditor payouts to the point that relatives inherit nothing. With a few estate planning techniques, though, you can reduce the risk of creditor demands diminishing estate assets.
Estate Planning Techniques for People in Debt
People in serious debt have a few options when it comes to preserving their estates. For example, some choose to move assets into a trust that creditors cannot touch. In California, an irrevocable trust removes the assets from the debtor’s probate estate. As a result, creditors cannot make a claim against those assets during the probate process (with some limited exceptions).
Other people choose to give away assets during their lifetimes to relatives, to ensure that the relatives receive inheritances without losing them to creditors during probate. Making lifetime gifts can have gift and estate tax consequences, though, so talk to a lawyer before you take this route.
Additional options for people with potential creditors include funding business entities with assets, planning for the costs of probate and taxes, and working to pay off debts now. There are many laws surrounding creditor access to the assets of a deceased or living debtor, so getting legal advice concerning your plans is always a good idea. Your lawyer may suggest even more options that you can use if you are worried about debts weighing down your estate.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.