Section 541(a)(5) of the Bankruptcy Code provides that property of the bankruptcy estate includes:
“Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date –
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement agreement with the debtor’s spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.”
What does this mean to the average filer?
Basically, if someone dies in the 6 months after you file bankruptcy and you inherit anything or receive life insurance proceeds, the inheritance or life insurance proceeds are part of your bankruptcy estate and could be used to pay the claims of your creditors. (§541(a)(5) also deals with property settlements in a divorce. This blog post focuses only on the inheritance issue.)
If you don’t want your inheritance to go to your creditors, you need to talk to the people you believe might leave you anything. Grandpa can change his will or life insurance beneficiaries any time until the day he dies. He can leave “your share” to your kids or other family members, remove you as a beneficiary, or include a valid spendthrift clause in his will. You could also disclaim any possible inheritance before he dies. Once he dies, you can’t retroactively change the will or disclaim the inheritance. If he decides to make any changes, he should speak with an estate planning or probate attorney.
You may feel the risk of someone dying and leaving money to you in those six months is slim. While you’re probably correct, remember that anyone can get hit by a bus tomorrow. And don’t forget about that great-aunt living in Las Vegas who is planning to leave you her $500,000 in gambling winnings. You might want to talk to her.
If you are considering filing bankruptcy, you need to carefully consider whether you want to (1) ignore this issue and hope no one leaves you money in the next six months, or (2) talk to your relatives about protecting any possible inheritances.
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