INHERITANCES IN BANKRUPTCY

As part of the intake process, I always ask clients if they have a great aunt or uncle who is going to leave them $1,000,000.  Invariably the answer is no.  I do this to alert clients to the fact that any inheritance given or to which the debtor becomes entitled within 180 days of filing for bankruptcy is part of the bankruptcy estate.  The trustees want me to give clients this information.  It is the law after all. 

Last week I had a client whose mother died within the 180 day period.  Obviously, this was sad for the client.  I think it is even sadder that her mother's assets are now being used to pay her daugther's creditors.  With proper estate planning this result could have been avoided.  In fact, good estate planning is important if one has many creditors.  If a client is being is being pursued by creditors or even before that point, if potential claims can be made against the debtor, then the debtor ought to alert relatives that this is a possibility.  In that case, a parent, for instance, can set up a testimentary trust with "spend thift" provisions.  These types of provisions allow the trustee to avoid payments to the debtor that would result in attachments by creditors.  There are exemptions under state law to protect spend thift provisions in trust documents.  We have an estate planning department and would be happy to assist you to protect prospective inheritances.

This blog is not intended to render legal services to the reader, including advice about bankruptcy or taxes. Consult with a lawyer concerning the specific application of the law to your unique circumstance.