Bankruptcy of a Child–What’s a Parent To Do?
Written by Myrtle Beach Bankruptcy Lawyer, Allen Jeffcoat
When you file bankruptcy, everything you have comes into your bankruptcy estate, including property inherited from a parent. However, by proper estate planning, parents can protect a child who might be experiencing financial problems–even if the child files bankruptcy.
Sally has had a long, happy life, and has been blessed with a wonderful family and a successful business that she and her late husband Jim started “up North” many years ago, then sold for enough money to comfortably retire to Myrtle Beach. Between selling her business and the assets she inherited from Jim, Sally has more than enough savings to last her lifetime and leave a significant inheritance to each of her three children, along with a significant gift to charity. Sally’s home is paid for, as is her vacation home in Maine, and she has no debt. Sally spends most of her free time visiting her seven wonderful grandchildren.
So why is Sally so anxious today? She visited her doctor last week, who confirmed that she’s been having a series of mini-strokes recently, and she’ll also need some hip replacement surgery soon. But that’s not what’s bothering her now. Now she’s in her lawyer’s office, working out changes to her Will that she’s been putting off for too long. Her visit with her doctor has added urgency to her meeting today.
“I’m worried about Junior” she tells her lawyer. “He’s been caught in the real estate collapse in South Florida, and he told me a few weeks ago that he might not make it without filing bankruptcy. I’m so worried about him and his young family that I can’t get a good night’s sleep.” She continues, “Even if he doesn’t file bankruptcy, he thinks that he may be facing some very large judgments against him that will take many years to go away.”
Sally pauses, then tells her lawyer, “I want to treat all three of my children the same with their inheritance if something happens to me. Heaven knows that Junior will need his share as much as the other two, if not more. I think his financial stress is hurting his health, and he has those four children to feed, raise and educate.” Then, with a flash of anger and frustration, she adds, “But I’ll be damned if I want anything that Junior inherits from me to go to his creditors. They’re ruining his life already! But what do I do about protecting Junior’s inheritance if I don’t make it through surgery and Junior’s finances collapse?”
Sally’s lawyer understands the problem. The Bankruptcy Code sweeps up all property of a debtor into a pot for creditors, even property received through inheritance at any time before and up to 180 days after a bankruptcy filing. There’s little if anything that Junior can do about the problem. Even if Junior doesn’t file bankruptcy, his judgment creditors may have many years to wait until Junior’s finances improve–whether through inheritance or otherwise–then pounce on him and seize his assets.
But there’s plenty that Sally can do to keep this from happening–as long as she sets up her will or trust so that Junior’s part of the inheritance goes not to Junior directly but into a discretionary trust for Junior and his family–a trust not administered by Junior but otherwise flexible. Sally can also use the same approach to take care of her disabled grandchild, without losing a lifetime of future government benefits. Sally’s lawyer outlines her options to her, and Sally smiles for the first time all day. She can’t wait to get home and call Junior.
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