The vast majority of individuals do not concern themselves with the idea that creditors will come knocking for their debts after they pass away, assuming their estate does not require probate. Typically, the deceased’s surviving family members handle legitimate debts such as utility bills, funeral costs, taxes, and medical expenses.
However, one cannot evade legal obligations to creditors, such as credit card companies, even in death. What happens if there is not enough money left behind to settle all debts and taxes? In such a scenario, creditors can lay claim to assets that are not part of the probate process.
In cases where probate proceedings are involved, the executor (the individual responsible for managing affairs after someone’s passing) may request the deceased’s heirs to sell or transfer a portion or all of their property to clear outstanding debts.
In many states, creditors typically have a window of three to six months to file legal claims with the executor. If a creditor who is aware of the probate proceedings fails to make a claim within the specified timeframe, they forfeit their right to pursue a claim against the executor.
If a person’s assets are not subject to probate, a creditor’s claim cannot be easily dismissed. However, the creditor can pursue the assets from the individual who inherits them after the original debt owner’s passing.
Strategies to Safeguard Your Home from Creditors
Protecting your estate from creditors is no simple task, but there are several strategies that may help maintain the integrity of your assets.
Liability Insurance as a Shield
One effective method to shield your home from lawsuits and creditors is to invest in ample liability insurance coverage. A substantial policy can assist in settling debts with creditors.
Tenancy of Entireties
When a property is jointly owned by a husband and wife, it falls under the tenancy of entireties. In this scenario, if one tenant is sued, the other tenant can claim full ownership of the property, making it inaccessible to creditor claims. However, there are limitations to this policy, such as both spouses being sued, one tenant passing away, or both tenants passing away, which could lead to the property being seized.
Limited Liability Companies (LLCs)
For individuals concerned about creditor actions, utilizing an LLC to safeguard assets is an option. However, only a few states recognize LLC laws for asset protection, with Wyoming being a notable supporter of this legal structure.
LLCs must have a legitimate business purpose, which can be challenging when dealing with personal assets. While rental properties can qualify for LLC protection, personal assets may incur additional costs and tax implications.
Probate and Qualified Personal Residence Trust (QPRT)
The Internal Revenue Code has introduced the qualified personal residence trust (QPRT) as a means to transfer personal property to heirs with minimal tax implications. Incorporating a QPRT into an asset protection strategy requires careful planning.
Establishing a QPRT involves transferring a house to the trust, allowing the grantor to reside in the property rent-free for a specified period. After this term, the remaining interest passes to the grantor’s children at a reduced value, providing significant tax benefits.
In the event of a lawsuit against the grantor, creditors may attempt to seize the grantor’s interest in the trust, potentially leading to the sale of the property. However, the trustee must continue paying the grantor’s annuity, complicating creditor efforts to claim the property entirely.
While there are limited methods to shield assets from creditors, exploring options like LLC ownership and DAPTs can provide additional protection.
