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Bankruptcy and Inheritance

By October 26, 2011Estate Planning

Estate planning gives you the option of leaving your assets to those of your choosing. Perhaps you may wish to leave assets to a person who is going through difficult financial times, maybe even needing to file for bankruptcy. Careful planners will want to ensure that their property passes to the intended beneficiary, and that the bankruptcy court will not take it all before the beneficiary can use or enjoy it.

When making estate plans, you need to understand how bankruptcy affects inheritance and gifts, so that the best choice can be made about how to pass along assets.

Bankruptcy Law

The federal Bankruptcy Code states that a debtor who files bankruptcy must inform the court if he or she receives an inheritance within 180 days of the date that the debtor filed the bankruptcy petition. The Bankruptcy Code calculates the time limit as 180 days from the time the person leaving the inheritance died, not when the debtor actually gets the assets, since some estates do not settle quickly.

For example, if a debtor's mother died five months after the debtor filed bankruptcy and left the debtor an inheritance, but the person did not receive the inheritance until two years later, it would still be part of the bankruptcy estate because the mother died within 180 days of the date the debtor filed his or her bankruptcy petition.

If the debtor filed chapter 7 bankruptcy, the assets then become part of the bankruptcy estate that the trustee distributes to the debtor's creditors. If the debtor filed chapter 13 bankruptcy, an inheritance means that the debtor has more disposable income and the court may need to review the repayment plan terms and increase the monthly payments.

All assets become part of the bankruptcy estate if the debtor inherits them within the specified time, no matter if it is money, a vehicle or other items of value.

In contrast to an inheritance, the bankruptcy court cannot make gifts that a debtor receives part of the bankruptcy estate after the bankruptcy is final.

Options for Protecting Inheritance from Bankruptcy

People looking to prevent the bankruptcy court from taking assets they wish to dispose of in their estate plans have options to accomplish this goal. A person could choose to establish a spendthrift trust and name the debtor as the beneficiary. Creditors cannot get at the assets in a spendthrift trust and the trust would not be considered part of the bankruptcy estate.

The person inheriting the assets can always disclaim an inheritance, as well, if he or she knows that the inheritance will just go to his or her creditors.

If you are concerned about making sure that your assets go to your loved ones and not to their creditors, consult with an experienced MH estate planning attorney who can advise you of your options.

Source: CreditCards.com, Will cash gifts, go to creditors after bankruptcy?, Sally Herigstad

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