Protecting Your Estate from Creditors – Planning Tips
An important estate planning goal for many individuals is to be sure that their money ultimately passes to their heirs, rather than their creditors. When you pass away, the tax man is not the only one who can take a bite out of the assets that you leave behind for your loved ones. Whether it is cash, real estate, retirement money, or other funds, inherited assets can suddenly come up for grabs in a number of scenarios when creditors and others come calling. You can often make your estate creditor-proof in Leawood by avoiding probate, which is designed to pay off creditors. Here are some guidelines to help you avoid probate and prevent outsiders from getting the money you have left for your heirs. Always consult with a trusted financial advisor when considering any changes to your estate plan.
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Use a trust instead of a will to transfer assets ” Establishing a trust is not only a key way to skip probate court, it can also prevent the assets you have spent a lifetime accumulating from going to predators who might slap your heirs with lawsuits. A trust can specify that the money only be used for certain purposes, like the education, care or support of a specific beneficiary. This way, there can be no payout to creditors. Trusts can contain specific language and provisions that prevent your beneficiaries’ creditors from seizing any trust assets. Unlike wills, trusts are not a matter of public record. They are a tool for maintaining privacy. In addition, trusts are much more difficult to contest than a will. A final advantage of a trust over a will is that a will has to go through probate, which is expensive and time-consuming. Probate costs can eat up more than 3% of an estate. So if you bequeath $1 million through your will, your heirs could pay more than $30,000 in probate expenses and wait a year or more for their inheritances.
Handle retirement assets appropriately ” Be careful with how you pass along retirement assets such as IRAs and 401(k) plans. Creditors can sometimes go after those monies if one of your loved ones winds up in bankruptcy court. To prevent this, leave IRAs to beneficiaries in a separate IRA trust to keep the funds away from creditors. The Supreme Court ruled in 2014 that any time a child or grandchild inherits an IRA, it is no longer protected from creditors. By creating a stand-alone IRA trust for children or grandchildren to inherit an IRA, your offspring will have access to the money, but creditors will not. Fortunately, married couples do not have to worry about this problem. Under current law, if one spouse dies with an IRA, the surviving spouse is allowed to receive the IRA assets as a “spousal rollover” and the funds are protected from outsiders.
Safeguard life insurance proceeds ” Money held in a life insurance policy is protected from creditors, so any death benefit or cash value is protected and will go directly only to the individuals or organizations you name as beneficiaries. But once life insurance proceeds are distributed as cash to your beneficiaries, the funds are open to attack from anyone. To prevent this, safeguard the life insurance by putting it an irrevocable life insurance trust (ILIT). An ILIT is a tool specifically designed to own life insurance. Just like other trusts, the ILIT has a trustee, beneficiaries and precise terms for distributions. You can add protective provisions, like a spendthrift clause and a discretionary distribution clause, to keep the insurance proceeds from your beneficiaries’ creditors. A spendthrift clause prohibits the trustee from transferring trust assets to anyone other than the beneficiaries. That includes an ex-spouse, creditors or even the IRS. A spendthrift clause also says no beneficiary is permitted to assign, pledge or sell any interest in the trust”whether trust principal or income. If the trustee believes the distribution would be wasted or claimed by the beneficiaries’ creditors, a discretionary distribution clause gives your trustee the right to withhold income and principal distributions that would otherwise be payable to the beneficiaries.
Title bank accounts and assets properly ” If you own joint assets or name beneficiaries on your accounts and assets, a creditor cannot seize what you leave behind after you die. Instead, the money will go directly to the person(s) listed on the accounts. If you are married, make sure your spouse is named as a beneficiary on the bank account, which keeps the asset from having to go through probate. Adding beneficiaries to financial accounts is another creditor-busting move, since those assets avoid probate upon the death of the first account owner. But in this instance, it is the deceased person’s creditors that will not get access to the money, not the creditors of the beneficiaries. Instead of having a joint owner listed on the title of certain accounts, a variation on this technique is to have a named beneficiary listed on your accounts, such as a 529 plan that may be for the benefit of a grandchild’s college education.
Payable-on-death accounts ” Another way to bypass probate and pass along the money to your heirs is to choose a payable-on-death (POD) or transfer-on-death (TOD) account designation. This differs from a joint tenant or co-owner arrangement because your heirs only have access to the fund after your death. Joint tenant and co-owners have access to the funds while you are alive.
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