Lately I’ve come across a number of people who are concerned about their potential beneficiary rights under wills or trusts as they consider bankruptcy. Once a bankruptcy is filed, a “bankruptcy estate” is immediately created. The general rule in bankruptcy is that every property right you have from ownership of real estate to ownership of a microwave becomes part of this bankruptcy estate. Beneficiary interests in wills or trusts are forms of property that must also be included in the bankruptcy estate. Unlike physical property, which can often be protected under a state or federal exemption statute, the protections for beneficiary interests are not so cut and dry.
The first thing to consider concerning wills and trusts is that the person making the will or trust (for our purposes we’ll call this person Grandma) may change the document at any time before she passes away. So, if you are a named beneficiary in Grandma’s will or trust while she is still living, you do not have an absolute right in the property set to be given you at Grandma’s death until she actually passes away. This means that so long as Grandma is still living, your (potential) inheritance cannot be touched in a bankruptcy.
The second thing to consider is that if Grandma passes away within 180 days (6 months) of filing the bankruptcy all the property you inherit would become subject to the bankruptcy. While it may be possible to protect some of this property from the bankruptcy through State and Federal exemption statutes, likely the best way to protect your inheritance is for Grandma to set up a spend thrift trust with you as the beneficiary. This would have the affect of protecting the inheritance from your creditors after Grandma passes away – even if she passes away during the 180 days following your bankruptcy filing.
If you have questions about the legal issues surrounding bankruptcy and inheritance, call Benjamin Skinner, experienced Arizona bankruptcy attorney for your FREE consultation today! (480) 648-8975.
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