By James W. Mallonee
In today’s economic environment, the need to protect your current assets as well as future assets (e.g. inheritance) is becoming more critical than ever. This article discusses those situations where a family patriarch who is financially stable has children who are under financial distress, insolvent or in bankruptcy and lose their parents’ bequests because the parent’s testamentary document did not contain a protective contingent trust and spendthrift clause.
The typical facts when a beneficiary’s inheritance is lost to a judgment creditor are these:
1. The parent has a Will or Trust document that leaves the bulk of their estate to their children;
2. The majority of the parents estate consists of cash (savings, CD’s, stocks, bonds or other like instruments);
3. One of the children is in financial distress (bankrupt or insolvent);
4. A reading of the parent’s Trust or Will contains no language that states that the property to be passed to a child may be held in trust if such child is insolvent or in bankruptcy.
The critical piece in the above set of facts is the language of the Will or Trust (#4 above) where it does not protect the child or children who may be financially insolvent or in the middle of bankruptcy proceedings. If no contingent language exists in a parent’s testamentary document to withhold a devisee’s share in the event the devisee is insolvent, the bankruptcy court or judgment creditors can seize such share. More often than not, the debtor is surprised to learn that his parents’ bequest to him or her is about to be seized because no contingent trust or spendthrift language protecting them in case of financial disaster is contained in their parents Will or Trust. In essence, the child’s share of their parent’s estate will be seized by either the bankruptcy court or a judgment creditor.
In most cases the contingent trust that is found in a Will or Trust targets those individuals who are under a specific age or persons who are disabled. A contingent trust generally takes the share of a parent’s estate that is to be delivered outright to a devisee and puts it aside. The funds that are put aside are then delivered to the devisee in limited increments for the purposes of assisting such devisee in their needs involving their health, education, maintenance and support.
The key to protecting a devisee’s share of an estate from being seized is not to let it come into the possession of the devisee (child). As long as the assets destined for a devisee is held by a Trustee or personal representative (who cannot be the child experiencing the financial distress), the bankruptcy court or judgment creditor cannot touch it provided that the estate’s administrator has the right to take possession of a child’s share in the event that child is insolvent, financially distressed or in bankruptcy proceedings.
When a Trustee or Personal Representative of an estate is granted the right to take possession of a child’s bequest for said child’s benefit, a spendthrift clause contained in the parent’s testamentary document takes over and prevents the courts and judgment creditors from having the right to attach to the assets. A spendthrift clause is a simple paragraph that states in pertinent part that the assets of the decedent are not available to creditors of any beneficiary of the decedent’s estate as long as such asset remains in the possession of the personal representative or Trustee of a trust.
You may be wondering how long would a devisee (decedent’s child) have-to-have their share maintained by a Trustee. The answer depends on the status of a person’s insolvency and bankruptcy proceedings. For example, once a bankruptcy court issues a discharge of a person’s obligations, the full amount of the trust for such child could be released with virtually no consequences. In the event of a judgment creditor, if the judgment is discharged by the bankruptcy court, the Trustee could once again release the full amount of the child’s funds to him or her with virtually no consequences. On the other hand if certain judgments or obligations are not discharged by a bankruptcy court, then in that event, the Trustee may have to hold a devisee’s share until such time as the statute of limitations passes on such judgment. Thus, it is important to know what judgments and obligations are being discharged by the bankruptcy court (if any).
If you or one of your children plan on seeking bankruptcy protection, the time to seek out a bankruptcy attorney is before you stop making your loan or credit card payments. This author strongly suggests that the time to seek the advice of a bankruptcy attorney is in anticipation of becoming insolvent, not after it. How can you determine if you are insolvent? Insolvency occurs when your assets are less than your current liabilities. It is easy to become insolvent if the assets you own (homestead) are not in balance with the amounts you owe on such assets (e.g. mortgage). If you continue to make the payments on your obligations and then file for bankruptcy, it is likely your attorney can save your credit score and many of your assets if you seek timely assistance.
This seems hard to fathom, but bankruptcy in and of itself does not cause a credit score to drop significantly, it’s the failure to make the four or five months payments preceding the filing for bankruptcy that causes a person’s credit score to rapidly decline.
As you can see, it is a good idea to review the language of your testamentary document to see if it contains a contingent trust, and if it does, will it protect your devisees from losing their share of your estate to a third party in the event the devisee is insolvent, financially distressed or in bankruptcy. If you are unsure about your testamentary documents, seek out an attorney of your choice and have your Will or Trust language reviewed. Moreover, if you anticipate being financially insolvent seek out a bankruptcy attorney to protect your assets. Don’t wait until you are four of five months behind in paying your obligations to seek the assistance of a bankruptcy attorney. Follow these recommendations because it may be best investment in time and expense you make for you and your children.
James W. Mallonee (Jim Mallonee) is a graduate with a B.A. degree from the University of South Florida and a Master of Science degree from Rollins College in Winter Park, Florida. He obtained his Juris Doctorate from the University of the Pacific, McGeorge School of Law in Sacramento, California. Prior to returning to Florida to practice law, Mr. Mallonee was employed by Intel Corporation for 22 years in such locations as New Jersey, Florida and California.
In addition to being a member of the Florida Bar since 2003, Mr. Mallonee serves on the Charlotte Community Foundation Committee for asset allocation and teaches Business Law at State College of Florida. Mr. Mallonee is also on the Board of Directors for the Military Heritage Museum located in Charlotte County, Florida.
His firm practices law in the following areas: Probate, Wills & Trusts, Guardianships, and Litigation in the areas of Real Estate, Guardianships and Estates. The firm has two locations in Venice and Port Charlotte, Florida.
James W. Mallonee, P.A.
946 Tamiami Trail, #206
Port Charlotte, FL 33953
(941) 206-2223
Facsimile (941) 206-2224
871 Venetia Bay Blvd., #225
Venice, FL 34285
(941) 207-2223