Overcoming Personal and Legal Challenges

Overcoming Personal and Legal Challenges

How bankruptcy can impact estate planning

Most people who start thinking about estate planning in Alabama do so because they want to provide for their family. However, many people fail to plan for all of the ways that other parties can drain their estate assets.

A bankrupt beneficiary could be a money pit

Sometimes, the family member you want to help the most is the most difficult to help. If you leave assets to a beneficiary who happens to be going through the bankruptcy process at the time of your death, the assets they inherit could end up being seized by creditors.

If you have a family member who has already completed the bankruptcy process, an inheritance they receive may still be taken. For a period of time after a bankruptcy is discharged, creditors can still seize certain property.

Leave the bankrupt person out of your will

On paper, the simplest solution to dealing with bankrupt family members is to leave them out of the will and the probate process altogether. After all, there’s no point in leaving an inheritance to someone who can’t actually collect it.

The downside to this solution is that your beneficiaries may not understand your reasoning for not including a bankrupt person in your will. Because you can’t guarantee that your beneficiaries will share their inheritance, you may want to find another way to provide for your bankrupt loved one.

Set up a trust for the bankrupt person

You may be able to protect a bankrupt heir’s inheritance by setting up a discretionary trust for them. A trust can be created that distributes assets to an individual only after the bankruptcy period has ended. That way, an inheritance may not be considered part of the bankruptcy estate.

There’s no single solution that will work for everyone in the estate planning process. However, setting up your will a certain way or creating a trust may be a worthwhile option to consider.