Let’s say you are a 54 year old male with terminal cancer. You know you’ll die soon, and have a daughter and a sister who are recipients of your life insurance policy.
You, before you die, hand over a large portion of land, and a bit of your property. Before you die you also run up your credit card debt. Dozens of thousands of dollars. Your sister is planning to use her part of the insurance policy to pay off part of the debt.
The question is…
Can the credit companies go after the property that your daughter got from you before you died? Are they likely to do so.
Will they go after her part of the life insurance policy? Are they likey to do so.
Thanks.
IANALawyer or accountant, but here’s what I reasonably confident about: If your daughter is legal owner of the property before you die, they can’t go after it to pay off your debts. Creditors must go after money in your estate; once it’s been distributed in a legal manner, it is out of their reach. Usually, “legal manner” includes a waiting period before the money can be disrtibuted and the estate liquidated, so your creditors do get a shot at it.
What I’m clueless about is whether an insurance death benefit paid to another is ever actually a part of your estate. My guess is no, they get it free and clear, since you’re already dead before it becomes an asset.
The beneficiary of the insurance policy gets the benefits and it’s not part of the estate. However, if the property was “deeded” or given to the daughter to avoid creditors, the creditors may be able to vitiate the gift on the basis of fraud to the creditors. They’d have to show that the property was alienated to defraud the creditors.
In Australia, the Bankrupcty Act (1966) contains "clawback provisions which allow the Trustee in Bankruptcy to void transactions that are specifically made to defeat creditors.
Depending on the circumstances, and the parties involved, transactions can be voided which go back as far as 2 years prior to bankruptcy. It is often prudent (although it won’t necessarily defeat the clawback provisions) to obtain a solvency statement from an accountant before gifting assets to other parties, if asset protection is an objective.
This post does not constitute legal advice.