When it comes to estate planning, a lot of people are blinded by the asset distribution process. While this part of the estate planning process is certainly pivotal in an estate plan, you can get a lot more out of your estate plan by thoroughly addressing other aspects of the process. This includes considering a health care directive and a power of attorney, but if you really want to leave as much for your loved ones as possible then you also need to know how to handle debt in your estate plan.
Without effective estate planning, your estate administrator will use your assets to pay off debts that remain after your passing. This means that funds you otherwise intended your loved ones to inherit can be quickly gobbled up. But there are estate planning strategies that you can deploy to avoid that from happening.
How to address debt in your estate plan
You don’t have to let your debt erode inter-generational wealth. Instead, you can proactively plan to shield your assets from creditors so that you properly provide for your heirs and beneficiaries. Here are some ways to do that:
- Utilize trusts: There are a lot of trust options out there. The good thing about many of them is that they protect assets from the reach of creditors. As a result, your named beneficiaries will receive those assets in accordance with the trust’s terms without fear that creditors will swoop in and take them away.
You have a lot of options here, too. You can create a charitable remainder trust to benefit a cause that you care about, a qualified terminable interest property trust to support a spouse, or a qualified personal residence trust that allows you to transfer a home. Just keep in mind that these inheritances might be subject to your heirs’ creditors.
- Use pay-on-death accounts: Your retirement plans and life insurance policies can be made payable to someone you name so that funds are paid out directly to them without being touched by creditors. That makes pay-on-death accounts an effective way to quickly transfer wealth while keeping it outside the reach of creditors.
- Lifetime gifting: The IRS allows you to gift several thousands of dollars to individuals each year. By giving money to your loved ones, you can see them enjoy the resources you’ve provided to them while removing those assets from your estate. This, in turn, will take those assets away from creditors who may otherwise be eagerly waiting to get their fingers on them.
It’s going to be a lot harder for your creditors to reach your assets if you relinquish control and ownership over your assets. Therefore, when analyzing which estate planning tools are best for you, be sure to consider how each impacts your ownership interest and choose those that give you, your assets, and your loved ones the greatest amount of protection possible.
Don’t shy away from the estate plan that’s right for you
Far too many people put off estate planning or haphazardly throw together a plan that doesn’t meet their needs. This can leave your estate susceptible to creditor collections and threaten to leave your loved ones without the resources you intended them to inherit.
That’s why even though the estate planning process can seem daunting, you need to face it head on. It’s not as scary as it seems, and many people are pleased when they realize how much a well thought out estate plan can do for them and their family. So, if you’re interested in what you can do to develop the estate plan that’s right for you, then now is the time to educate yourself on the process and seek out the help you need to bring your vision into fruition.