A person with creditor problems or a money judgment against himself may feel “lucky” if a relative dies and leaves him an inheritance. Yet, the inheritance is an asset as soon as it is determined by a court, or pursuant to a living trust, that the debtor has a beneficial interest. If money is distributed from the decedent to the beneficiary the money is even more accessible to creditors If the debtor accepts the inheritance and then transfers the money to another non-debtor family member or to a protected asset, such as an annuity, that transfer will be attacked as a fraudulent conveyance subject to reversal. The best situation would be if the decedent had made a bequest to his heirs or beneficiaries in a trust for their benefit rather than outright distributions, assuming the trust document had proper spendthrift language to provide creditor insulation. Unfortunately, the decedent himself usually does not have asset protection concerns at the time the testamentary will or trust is created, and protection of the inheritance from the creditors of one or more of his heirs is not an important estate planning motive.
One of the most important tools of asset protection planning is involving parents or grandparents in your asset protection plan by encouraging them to leave your inheritance in protective trust. The heir with asset protection concerns must take responsibility for this part of family planning. For the heir or beneficiary, a bequest in trust with liberal distribution instructions provides nearly unrestricted use of the inheritance yet protects inheritances from judgments
.If you are a judgment debtor who is faced with the prospect of an inheritance in the form of an outright bequest you may consider a “disclaimer” whereby you waive your right to the inheritance, and the inheritance automatically passes to you lineal decedents. In such case, a creditor could argue that the disclaimer was a form of fraudulent conveyance. A disclaimer would be easier to defend than a transfer of inherited money after the heir or beneficiary takes possession of an outright bequest. I am unaware of any court decisions reversing a disclaimer as a fraudulent conveyance.
Last updated on May 22, 2020