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What if a beneficiary has serious debt issues?

On Behalf of | Mar 29, 2024 | Estate Planning

When creating an estate plan, you may have concerns about some of your beneficiaries. For instance, maybe you have a beneficiary who has significant issues with debt that they can’t afford. Or perhaps they just have frivolous spending habits, and you’re worried about what their debt is going to look like in the future.

From your perspective, the problem is that you may give the person an inheritance, which will then quickly be claimed by creditors for these outstanding debts. You don’t necessarily want to use all of the money that you’ve earned to pay off someone else’s debt. You would like the money to stay within your family. What options do you have?

Setting up a trust

One of the best things you can do is to put the inheritance in a trust. This means that the beneficiary does not own it. The trust is separate from them, and the trustee has to authorize payments to the beneficiary. Creditors may not access this account, even if they’re allowed to get money from other sources, such as that beneficiary’s personal income.

By doing this, you can also use the trust to give a certain focus to that inheritance. For example, maybe you want to specify to the trustee that the beneficiary should only use it to pay for college tuition or other educational costs. Not only do you keep creditors from simply taking the money, but you guide the beneficiary in ways that may improve their life.

This is just one of the ways to use a trust in estate planning. Carefully consider all of the options you have while getting your plan in place.