Receiving an inheritance can be a mixed blessing.

If you have a judgment against you there is little you can do to protect the property you have inherited. With the judgment, your creditors can ask the court for a wage garnishment or bank account garnishment and place a lien on your real property. A wage garnishment remains in place for ninety days and a bank account garnishment only works once for a specific account, but both can be renewed. A lien on real property remains in place during the entire period of the judgment. A judgment remains in effect for ten years and can be renewed for an additional ten years.

If a creditor attaches a lien to your home, the lien would be satisfied when you sell your home. It could also cause you problems if you wanted to obtain refinancing on your home.

Generally, retirement accounts are protected from creditors. However, in June of 2014 the United States Supreme Court held in Clark v. Rameker that funds held in inherited IRAs are not “retirement funds” for purposes of the bankruptcy exemption.

Whether you receive an inheritance under a will or trust, the issue is if the creditor is aware of your inheritance. When a creditor sues in court to collect the debt you must disclose all your assets. However, once the process is finalized and a certain amount of time has passed, you no longer have a duty to inform the creditors of new assets. This does not necessarily protect your inheritance from your creditors, however. The creditors may periodically attempt to collect on the judgment. For example, a creditor can monitor probate cases to see if you are a beneficiary. A creditor may also periodically attempt bank account garnishments at banks where you may have an account.

Proper estate planning by a decedent can protect a beneficiary’s inheritance. Ideally, the decedent would have made provisions for you to receive your share in trust. This trust, with spendthrift provisions, does protect your inheritance from your creditors while held in trust. However, as the Trustee makes distributions of trust assets to you the portion you receive would become subject to the judgment against you. Again, the creditors would have to be aware of these distributions, which may be unlikely.

Another option would be for you to ‘disclaim’ your inheritance. The disclaimer must be made within nine months and you cannot have received any economic benefit from the disclaimed assets. When you disclaim, it is as if you had predeceased the decedent. The terms of the will or trust controls who receives your share. It may be your children or siblings. Your creditors might attempt to challenge this as a fraudulent transfer but likely would not be successful.

If you receive your inheritance and then transfer it to another person your creditors would attempt to challenge the act as a fraudulent transfer because you knew or should have known about the creditor’s claim and judgment.

Finally, your inheritance might give you the opportunity to negotiate a settlement with your creditors. It may be possible to reach an agreement to pay a portion of the debt and reduce or waive the interest. You need to understand that you will restart the statute of limitations on the debt (usually six years), if you take this step. Any agreement should be in writing signed by both parties and you should keep a record of your payment.

An experienced estate planning attorney can help you or your family members update estate planning if creditors are or may become a problem. Contact the Estate Planning attorneys with the Law Offices of Nay & Friedenberg in Portland, Oregon at (503) 245-0894 to set an appointment.

If you would like to learn more about estate planning options to protect your family, click here to receive our FREE Legal/Financial Planning Guide.