Probate, Trusts, and Estate Law Blog

GUEST POST: Asset Protection If Your Child Files for Bankruptcy

If you want your family assets to stay in the family and not go to the creditors of your beneficiaries/heirs, you need to speak to your estate planning attorney ».

The following is a guest post by Bret Nason, Attorney at Law.

As a bankruptcy attorney, I frequently help clients protect their potential future inheritances from the bankruptcy trustee. What if you're not filing bankruptcy yourself, but are seeking to protect family assets in the event one of your children or grandchildren files for bankruptcy?

Section 541(a)(5) of the Bankruptcy Code () provides that property of the bankruptcy estate includes:

"Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date -

(A) by bequest, devise, or inheritance;

(B) as a result of a property settlement agreement . . . ; or

(C) as a beneficiary of a life insurance policy or of a death benefit plan."

In other words, if someone dies within 6 months of a bankruptcy filing and the debtor inherits anything or receives life insurance proceeds, the inheritance or life insurance proceeds are part of the bankruptcy estate and could be used to pay the claims of creditors.

If you want your family assets to stay in the family and not go to the creditors of your beneficiaries/heirs, you need to speak to your estate planning attorney. There are many ways to protect these assets, including:

• Leaving the debtor's share of any inheritance to his/her children or to some other family members
• Removing the debtor as a beneficiary
• Including a valid spendthrift provision in your will, and
• Having the debtor disclaim his/her inheritance BEFORE you die

Each state has its own laws regarding asset protection, so speak with your local estate planning attorney before making any decisions.

You may feel the risk of dying in the six months after your child or grandchild files for bankruptcy is slim. While you're probably correct, it does happen. If you know that someone to whom you plan to leave money is considering filing bankruptcy, you should speak with him/her. Too many bankruptcy clients let pride get in the way of speaking with family members and wind up losing assets as a result. After you've had your family meeting, make sure you discuss the issue with your estate planning attorney.

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All the best,