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Modern Estate Planning Blog

Elder Law & Special Needs Planning

Sacramento Wills and Estates Lawyer Explains, “How Will My Bankruptcy Affect My Inheritance?”

September 29, 2010

If you saw the flurry of headlines last week, you’ll know that the “great recession” in the US is over.

I don’t know who decides these things, but as a Sacramento wills and estates lawyer, I look around and still see far too many friends and family members struggling to recover from the financial chaos to really consider it over. I do think things are on the upswing, but it’s far too early to say we are out of the “recession” woods just yet.

However, one of the really sad consequences of the recession was watching the number of families who had to go through bankruptcy. Even worse are those families who stood to inherit cash or items only to have them lost at the hands of the bankruptcy court. Let me explain…

Suppose you had a family member pass away who left you a cash gift in their will or trust. On the surface it seems like this would be a much needed relief to families dealing with bankruptcy. However, Federal bankruptcy rules say if you inherit money from a person who dies within 180 days of the date you filed for bankruptcy you must tell the courts. The money then becomes a part of your bankruptcy and is distributed to your creditors.

This also applies to items that you may inherit such as cars, jewelry or furniture. All of these items are subject to the administration of the bankruptcy estate. However, this doesn’t mean that items like this are certain to go up on the auction block. You can claim exclusion on certain things and the bankruptcy trustee has a certain amount of discretion in choosing what to liquidate. However, it can be extremely stressful to think about a family heirloom that has been in your family for years going to your creditors.

Good estate planning can avoid all of these nightmares. It is possible to set up special trusts called “spendthrift trusts” for your loved ones so that any inheritance they receive from you will be out-of-reach to the creditors. There are also other ways to protect what you will leave to your beneficiaries, but it is critical to get the advice of a competent Sacramento wills and estates lawyer.

Planning to avoid giving your hard-earned wealth to creditors is not illegal or immoral. You should think of it the same way you would when considering tax planning. Tax planning is fine, but tax evasion is not. The difference is whether you play by the rules and are honest. For example, not telling the courts you received an inheritance is illegal and you could face serious consequences. However, you are not skirting the rules if you are the recipient of a spendthrift trust. That wasn’t your choice.

So, even though we are supposedly over the greatest financial crisis since the Great Depression, it is still wise to consider the specific situations of your beneficiaries when setting up your estate plan.

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My wife, Sue and I really appreciate the concern and care Heather took in doing our estate planning. It has given us peace of mind. Heather keeps us informed of the latest changes in the laws that we might want to consider. We highly recommend her and the Chubb Law Firm.

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