Can Creditors Go After Property You Inherit?

An inheritance can be a mixed blessing. It often leads to increased financial freedom. However, depending on your state of residence and the type of property you inherit, your inheritance could end up benefiting your creditors more than it benefits you. If you have debts you haven't repaid, your creditors might be able to sue you and take your inheritance.

Procedure

While there are some exceptions, creditors can go after most types of inherited property. However, they cannot touch any of your property, inherited or otherwise, unless they follow certain legal procedures. First, a creditor must sue you and win a judgment against you. Armed with a judgment, your creditor can levy your bank accounts and place liens against your property.

IRA

Depending on which state you live in, an inherited Individual Retirement Account (IRA) might be protected from your creditors. The federal bankruptcy code protects retirement funds, including IRAs, of the person who contributes money to the account. Some states extend that protection to beneficiaries who inherit an IRA. Other states, including Wisconsin, have concluded that IRA benefits are not "retirement funds" to those who inherit them; therefore they're not protected from creditors.

Trust

If you are the beneficiary of an irrevocable trust, money or property that remains in the trust might be off-limits to your creditors. This is generally true if you do not have direct control of the timing or distribution of trust funds, and if the trust contains provisions prohibiting the trustee to make distributions to creditors or other non-beneficiaries.

Your inheritance is only protected while the funds or property remain in trust. Once the trustee makes a distribution to you, your creditors can access it.

Disclaimer

You may be able to keep an inheritance in the family and out of your creditors' hands by disclaiming the property. For a disclaimer to be effective, you must state in writing that you completely and permanently refuse to accept any interest in the property. This written statement must be given to the personal representative of a decedent's estate within nine months after the death, and you cannot accept any interest in, or benefit from, the disclaimed inheritance. You may not take an inheritance and then give it back with a disclaimer. Property that has been disclaimed goes to the next appropriate heir or beneficiary. If the decedent leaves a will naming a secondary beneficiary, the inheritance passes to this person. If there is no estate plan, state law determines which heir is next in line.