In planning your estate, consider that it will need to address not just distribution of your assets but also outstanding debts and creditor claims. Debts an estate may have can include personal loans, credit card debt, medical bills, business debts, and unpaid taxes. These need to be satisfied prior to the distribution of remaining assets to your beneficiaries; hence, it is very important that your estate plan includes mechanisms to handle these issues properly.
Protecting Your Estate from Creditors
One of the best ways to protect your estate from creditors is through a revocable living trust. It allows you to transfer your assets into the trust so that, first, they are not considered for probate, and second, it better ensures they are safe from creditor claims. Other ways this can be done are through joint ownership and beneficiary designations for certain kinds of assets, as in bank accounts or life insurance policies. These assets generally avoid probate and pass directly to the surviving co-owner or beneficiary named to receive the asset upon your death, and are, therefore, less available to creditors. Life insurance can also play two roles in your estate plan: It may provide liquidity to pay your debts, and it can protect other assets for your beneficiaries. These funds can be further protected by having the policy held in an Irrevocable Life Insurance Trust, outside of your estate and beyond the reach of creditors.
Gifting of Strategic Assets
Gifting of assets during your lifetime is another method to reduce your estate's size, which in turn will help limit the pool of assets available to creditors. However, one needs to consider the potential gift taxes and the Medicaid "look-back" periods that may impact your overall estate plan.
Dealing with Insolvency
If it can't pay all its debts, the estate may be "insolvent." In that event, as described above, creditors will be paid in order of priority. By the time your turn comes around, there may be little or nothing for your beneficiaries. Do keep in mind, however, that generally your heirs will not be required to pay for your debts unless they have cosigned or guaranteed them. This is another reason why careful planning regarding your debts is important—to protect the inheritance left for your loved ones.
The Need for Updates to Your Estate Plan Regularly
Considering the complexities involved in dealing with debts and creditors, it is imperative to review and update your estate plan regularly. Financial conditions may change, and keeping your estate current means that your executor will be well placed to know what is where and that your plan will accurately express your wishes. These strategies include asset protection, debt burden minimization, and protection of the intended inheritance for the beneficiary. Assistance from an estate planning attorney will help in fine-tuning such approaches toward unique circumstances and give peace of mind about an estate being well-prepared for any potential financial obligations that may come up in the future.
