When it comes to estate planning in New York, many people do not realize how debt can affect their preparations. Though they are taking measures to preserve and transfer their assets to their heirs, there are special considerations you may want to include in your plans to protect your assets from potential creditors.

It is important to consider your personal as well as your beneficiaries’ financial awareness and profile. If you have unresolved debts at the time of your death, your creditors have legal standing to sue your estate for repayment. This can reduce the size of your gifts, or deplete them entirely. If your plans include revocable and irrevocable trusts, consider the following information on how debts can affect them.

Irrevocable trusts

Irrevocable trusts can help protect assets and reduce tax liabilities, but if your beneficiaries file for bankruptcy or are sued by creditors, they could lose a portion or all of what you leave them. One potential way to bypass this is to incorporate a spendthrift clause. That way, if a named beneficiary files for bankruptcy, her or his creditors cannot seize assets you left in that trust. Irrevocable trusts do not shield your assets from your debts.

Revocable trusts

On the other hand, if you die with debts, to keep your loved ones from losing their inheritances to your creditors, you may want to provision a revocable trust. A revocable trust enables you to remain in control of all included assets until you die, in addition to giving your estate some privacy and giving you the flexibility to include provisions for incapacity and end-of-life care. Upon death, the testator’s creditors cannot go after the assets included in revocable trusts because they automatically become the property of the beneficiaries.

Trusts offer a variety of benefits to families, but they do not provide complete protection from creditors. Though debt protection should be a priority, it should not be the sole reason for structuring trusts into your estate plans.