Many people don’t worry about creditors coming after their estate once they pass away, especially if their estate doesn’t go through probate. Typically, the surviving family members handle legitimate debts, including utility bills, funeral costs, taxes, and medical expenses.
However, legal obligations to credit card companies or other creditors don’t simply vanish. If you haven’t left enough to cover all debts and taxes, creditors can claim assets that aren’t part of the probate process after your death.
During probate proceedings, the executor (the person responsible for managing the deceased’s affairs) may need to ask the heirs to sell or relinquish part or all of their inherited property to settle outstanding debts.
In most states, creditors have a limited window—typically three to six months—to file claims with the executor. If a creditor who is aware of the probate proceedings fails to file a claim within this period, they lose the right to pursue the debt.
If an estate doesn’t go through probate, creditors have a harder time making claims. However, they can still pursue the property from the heirs who inherited it.
Strategies to Protect Your Home from Creditors
Shielding your probate assets from creditors isn’t straightforward, but there are several strategies that can help safeguard your estate.
Liability Insurance
One effective way to protect your home from lawsuits and creditors is to purchase substantial liability insurance. A comprehensive policy can help you settle claims with creditors.
Tenancy by the Entirety
When a property is jointly owned by a married couple, it is known as tenancy by the entirety. In this arrangement, if one spouse is sued, the other can claim full ownership of the property, preventing creditors from seizing it. However, this protection has limitations: it doesn’t apply if both spouses are sued, if one spouse dies leaving the other with the debt, or if both spouses die.
Limited Liability Companies (LLCs)
If you’re concerned about creditors and lawsuits, you can use an LLC to protect your assets. However, only a few states, such as Wyoming, have strong laws supporting LLCs for asset protection.
LLCs must have a business purpose, which can be challenging to establish for personal properties. However, if the personal asset is a well-structured rental property, it may qualify. Keep in mind that using an LLC for personal assets can incur additional costs and may result in losing tax benefits.
Probate and Qualified Personal Residence Trusts (QPRTs)
The Internal Revenue Code allows for Qualified Personal Residence Trusts (QPRTs), which help transfer personal property to children with minimal tax implications. However, incorporating a QPRT into your estate planning strategy requires careful consideration.
To set up a QPRT, the grantor transfers their home to the trust, allowing them to live in it rent-free for a specified number of years. After this period, the remaining interest in the property passes to the grantor’s children. The value of the children’s gift is reduced by the value of the grantor’s retained interest, allowing the children to acquire the property at a lower value than its market price.
If the grantor is sued, the creditor may attempt to claim the grantor’s interest and force the sale of the house. In such cases, the QPRT trustee must pay the remaining annuity term to the grantor, complicating the creditor’s efforts to seize the property. While this strategy can make it difficult for creditors to claim the property, it doesn’t offer complete protection.
There are limited ways to fully protect property from creditors, but strategies like using LLCs and QPRTs can provide some level of security.
