Can Debt Be Collected From My Inheritance?

By Cindy DeRuyter, J.D.

Can Debt Be Collected From My Inheritance?

By Cindy DeRuyter, J.D.

If you're expecting an inheritance after a loved one's death, you may not get as much money as you think you're entitled. If your deceased loved one had outstanding debt, their creditors can file claims against the estate.

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In addition, if your creditors sue you for payment of your own financial obligations, a judge could order you to pay such debts from your share of inherited assets.

Claims Against the Deceased Person's Estate

When someone dies, their debts usually do not die with them. Instead, the person's estate is responsible for paying valid debts, final expenses, and other claims. One of the personal representative's or executor's responsibilities in the estate administration process is notifying interested parties—including creditors—of the deceased person's death. Creditors then have a statutory period of time to file claims or demand payment.

The personal representative is responsible for identifying and paying valid claims. If the estate's liabilities are greater than its assets, the estate is insolvent. Individual state laws provide certain protections for beneficiaries of insolvent estates under certain circumstances. For example, if the deceased person left a spouse and children who are minors, a certain amount of estate assets or types of assets (such as the homestead) may be exempt from creditors' claims. These family allowances and other exemption provisions are designed to avoid impoverishing beneficiaries who could otherwise face insolvency themselves if creditors claimed all available assets.

Heirs' and Beneficiaries' Debts

Sometimes, a beneficiary's own creditors attempt to obtain payment of the beneficiary's financial obligations after an inheritance. Your creditors cannot take your inheritance directly. However, a creditor could sue you, demanding immediate payment.

The outcomes of such lawsuits depend on the underlying facts and circumstances. The court could issue a judgment requiring you to pay your creditors from your share of inherited assets. Sometimes this type of judgment is enforced through a lien against inherited real estate or a levy against inherited assets in a checking or savings account.

If there are several beneficiaries and one beneficiary's personal debts total more than their share of the inheritance, the other beneficiaries can have peace of mind knowing that their shares are not reachable by the indebted beneficiary's creditors. Creditors can only recover assets up to the debtor beneficiary's share of the inheritance.

Assets Held in Trust

In some situations, where the deceased person left assets to beneficiaries through a spendthrift trust or an asset protection trust, creditors cannot obtain judgments against a debtor's share of inherited assets.

Spendthrift trust provisions protect assets from the reach of creditors, but they are generally only effective when the beneficiary does not have control over the assets. In other words, if the trust agreement gives control over distribution decisions to the trustee rather than providing for an outright distribution to the debtor beneficiary, that beneficiary's creditors may not be able to enforce a judgment against the beneficiary's share.

In some states, wealthy individuals or others concerned about their estates becoming the target of creditors have another planning tool at their disposal: asset protection trusts. This type of trust is also designed to keep trust assets out of the hands of creditors.

If your deceased loved one owed money at the time of his or her death, those debts will generally be paid back before you receive your share of the inheritance. And your own creditors may claim some or all of the proceeds you ultimately receive. Be aware that trust and estate law is state specific, so check with your attorney to determine how debts may impact your inheritance.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.