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How to estate plan to shield assets from creditors

On Behalf of | Dec 11, 2023 | Estate Planning |

When you engage in the estate planning process, your hope is to pass down as much wealth as possible to your loved ones. Your ability to achieve that goal can be jeopardized by your creditors, though, who are hungry to get their hands on your wealth to recoup debts that are owed. That might leave you stressed out, thinking that your hard-earned wealth will be severely diminished by these creditors’ claims, which very well could happen without effective estate planning.

That can be stressful to think about, but you shouldn’t let it consume you since there are ways for you to shield much of your wealth from creditors’ reach. But how do you go about doing that? Let’s take a closer look.

Estate planning options to avoid creditor claims

One of the most effective ways to shield your estate’s assets from creditors is to transfer those assets so that you technically no longer own them. You can do this by creating irrevocable trusts. With these types of trusts, you cannot take property out of the trust once those assets are placed within the trust. Here are some of those trust options:

  • Charitable trusts: These trusts can be used to support a cause or non-profit organization that you care about. There are various ways to leave assets to these organizations, such as through a remainder trust that supports a loved one for their lifetime first with anything that’s left over being directed to the charity, or a charitable lead trust that leaves assets to a charity first for a specified period of time with anything left over after that timeframe runs being given to another named individual.
  • Generation-skipping trust: With this type of trust, assets ownership is transferred over to the trust, then, upon your death, those assets are distributed to your grandchildren, skipping over your children. This can shield assets from creditors and reduce estate taxes.
  • Spendthrift trust: Here, assets are placed in a trust and are released incrementally to a named beneficiary. This ensures that the assets aren’t spent away too quickly while also protecting those assets from the reach of creditors. It’s worth noting, though, that once assets are released from the trust, they may become accessible to your beneficiary’s creditors.
  • Special needs trust: This trust type is meant to help care for a loved one who has special medical needs. The use of these assets is wide ranging while having little to no impact on your loved one’s ability to qualify for Medicaid.

There are other steps that you can take to shield your assets from creditors. For example, you can give monetary gifts to loved ones while you’re still alive, and they’re even tax-free so long as they amount to less than $17,000 per year per individual. Utilizing pay-on-death accounts, while not a failproof way to keep creditors away from your assets, can give you a certain amount of protection, too.

One of the great things about the estate planning process is that you can tailor it to suit your needs. Therefore, to bring your vision of the future into reality, you have to first determine what that future looks like, then diligently educate yourself on which estate planning vehicles will get you there. That way you can make the decisions that are best for you, your estate, and your loved ones.



Photo of Jennifer D. Sharpe