Can the State Take Your Inheritance if You Owe Them Money?

by John Cromwell

    When you owe a state money, such as for back taxes or child support, you may feel like that it can take any of your property that it wishes, including your rights to an inheritance. While traditionally an inheritance meant property that a person received from the estate of a decedent without a will, the modern definition includes any property transferred by an estate. An inheritance can be conveyed in numerous ways, and how you receive your inheritance can determine whether a state can seize your property to satisfy your debt. Please note that state law varies. To determine the rules regarding property seizure relevant to your situation, you need to review the law of your state.

    Probate

    The most common way of receiving an inheritance is through probate. Probate begins by gathering all the property the decedent owned when he died into an estate. Under court supervision, a representative pays off the decedent’s outstanding liabilities using the estate's assets. Whatever remains is distributed to the decedent’s beneficiaries. While the person who is going to leave you an inheritance is still alive, you have no right to any of your possible inheritance property since the person who will leave it to you still owns it. Only after he passes away and his property goes through probate do you have any claim. As a result, the state can seize probate property only after it has been transferred to you.

    Trust Property

    While property that goes through probate is generally not subject to conditions, sometimes a decedent will transfer property as a trust. For the beneficiary, this means that while he may have rights to the property, it will be managed by another person and his access to the property may be limited. Since the beneficiary has limited access to the trust, it may appear that the beneficiary does not “own” the trust assets and therefore the state cannot take the trust assets to satisfy his debts. However, the state can place a lien on the trust assets so that any distributions that the beneficiary receives will go to the state instead. The state can also compel the beneficiary to demand payment from the trust to satisfy the debt, if the trust agreement permits the beneficiary to demand payment.

    Spendthrift Trust

    A spendthrift trust is specifically designed to prevent creditors from seizing trust assets to satisfy the debts of beneficiaries, and is one way that a decedent may transfer an inheritance. These trusts are structured so that the beneficiary gets a specific amount of funds periodically, but the beneficiary cannot demand more funds. The beneficiaries are also specifically prohibited from selling their rights to the trust to satisfy a debt. However, a spendthrift trust does not prevent a state from seizing trust assets to settle debts that it is owed.

    Heirs' Property

    A final type of inherited property that a state might try to seize is heirs’ property. Heirs’ property is an asset, generally real estate, that is transferred to several heirs who co-own it as tenants in common. This means that each individual owns a percentage of the property but has the right to use the entirety of the asset. A state could seize that property right, but would only gain the rights of the creditor. So if a state seized a creditor’s right to heirs’ property, and the creditor had only a 5 percent stake, the state would control only 5 percent of the property.

    About the Author

    John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.