Protecting the Inheritance of Adult Children Through Bankruptcy

          If a person filed a Bankruptcy case and is entitled to inherit money or other property, they may lose the money or property to a bankruptcy trustee to be used to pay the trustee’s fees and their creditors. This risk of loss continues for any money or other property the bankruptcy filer (or debtor) may inherit even until 180 days after the filing of their bankruptcy case.

         One solution is to use the exemptions available to protect property used to help get a fresh start in life. But these property exemptions are limited in amounts. 
Another answer to this difficult problem is for the parents to set up a Spend Thrift Trust for their son or daughter. The advantage to using a Spend Thrift Trust is that a third party (also called a trustee or fiduciary) has control over the money or other trust assets and the adult child does not. Therefore, Bankruptcy Trustees and other creditors are not able to take the property in the trust. This even protects money that the adult child receives from the trust.
Another solution can be to make the adult child the beneficiary of the parents’ Investment Retirement Account or 401(k) account. Bankruptcy laws and New Jersey law protect these accounts from ever being available to bankruptcy trustees or the adult child’s creditors.