When Your Intended Beneficiary Has Issues with Creditors

Creditors can wreak havoc on your plans. Most of us would like to pass our estates to our loved ones directly when we die—so that they may benefit from the money in any way they see fit. But sometimes a loved one has little luck with financial matters. Perhaps they have taken calculated risks in business and fortune turned against them. Maybe they have been sued, whether for spurious reasons or stemming from a real issue. Or maybe they have simply proven inept in money  management. Under each of these scenarios your intended beneficiary is likely to wind up having creditors, who will want to take a bite out of any inheritance your loved one may receive from you. Then your hard-earned assets would not provide the benefit to your beneficiary you had hoped they might. But there are ways to manage such a situation, which our estate attorneys can help with.

 Clearly, in this situation giving assets directly to your credit-heavy beneficiary is ill-advised. So a simple outright distribution in a will won’t do the trick. No, this situation calls for a different legal animal altogether: a trust.

Which brings us back to our scenario in which a loved one has issues with creditors. A lump sum inheritance would be like a chunk of raw meat hurled into a piranha tank. Anyone watching from the outside would see a mad churning of activity, the water would cloud up, and in the end there’d be nothing left but the detritus of your good intentions. But take that lump sum, create a trust for it to inhabit, and instruct the trustee to disburse those funds to your beneficiary according to particular procedures, even for certain purposes such as to pay a monthly mortgage without the money passing through your beneficiary’s hands—and the creditors won’t have anything to sink their teeth into. Your beneficiary will get all the benefit you’d hoped they would.

Virginia Code § 64.2-742 does permit a court to allow creditors to reach a beneficiary’s trust funds, if there is not a “spendthrift provision” (as required by § 64.2-743) included in the trust. So this is a key element to our scenario. And if it’s done wrong, the entire purpose of the trust may be undermined.

We Can Guide You in Dealing with Estate Planning for Beneficiaries with Creditors

If you’re considering creating a trust to protect the inheritance you bequeath from being gobbled up by your beneficiary’s creditors, a good place to start is by attending one of Promise Law’s free estate planning workshops. These workshops provide a great foundation of information that everyone needs to make sound planning decisions. Moreover, if you attend a workshop, you also get a complimentary one-on-one consultation with one of our attorneys.


Join us for a workshop to learn more about how to address your legal needs.
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