In our last post, we began discussing the importance of incorporating strategies for protecting one’s wealth from liabilities within the estate planning process. Here we’ll look at some recommendations to help out readers get started with this process.
The first tip is, before even starting on any specific strategy, to be honest with heirs about your debt. If heirs are not aware of the financial situation, they may end up living beyond their means and receiving an unpleasant surprise when they find out their inheritance needs to go toward paying off creditors. Providing a list of assets and liabilities to successors, as well as the names of any beneficiaries, can help them plan accordingly. As much or as little information can be provided as is desired,
Life insurance can be a useful tool for protecting one’s wealth from creditors. Life insurance is usually exempt from creditors, though the specific exemption amount does vary by state.
Similarly, IRAs, 401(k) accounts and the family home are shielded from creditors in some states, or can at least be difficult for creditors to reach since they don’t go through probate. The important thing with these types of assets is to specifically name an individual as the beneficiary, not one’s estate.
Loan protection insurance may be an alternative to buying life insurance. These are declining-term policies that pay off specific loans if you die or become disabled and unable to pay. The value of these policies decreases as one pays of the loan, whether it be for a car, credit card, or a mortgage.
A final tip is a fairly simple one-begin paying off your debt now. This can involve coming up with a common sense plan to begin paying down the debt before death, adjusting as one’s finances are able.
As with any estate planning approach, it is important to work closely with the proper experts to ensure everything is done correctly.
Source: Fox Business, “Five Steps to Prevent Your Debt From Haunting Your Heirs,” Michelle Crouch, March 12, 2013