A number of recent clients have expressed a concern about leaving their home to a child who has a judgement filed against them. The judgement could result from numerous places, such as any of the following: a civil court case that was lost; personal injury matters; IRS collections; a criminal situation with a financial penalty; credit card debt; and malpractice lawsuits.
In these cases, we first make sure that the judgement is certified and recorded to confirm that a judgement lien actually exists. Many judgement liens are state specific and would have to be perfected in Florida if the judgement is from another state. Sometimes, a beneficiary thinks that there is a judgement against them, when there really is no judgement, or the judgement may have expired. For example, many IRS judgements expire after ten 10 years from date of assessment. Creditors have a number of tools in their arsenal with which to try and collect a perfected judgement. They may be able to garnish wages, lien personal and real property, or even seek to have an asset sold to pay off a judgement.
As long as the debtor beneficiary does not own the home, no judgement can attach against the home. This means that while the home is being processed by a probate court or a trust administration, the debtor beneficiary may have a few options available to him or her if he or she acts fast. First, the debtor beneficiary could attempt to negotiate a settlement of the debt knowing that some wealth will soon be forthcoming. This works better with smaller debts or older debts that are in danger of expiring due to passage of time (generally 10 or 20 years maximum in Florida). This usually allows the debt to be paid off with a significant discount, as some money now is hard for a long-time creditor to pass up. Second, the debtor beneficiary could make the home his or her homestead property thereby exempting the property from his or her creditors. This option only works if the debtor beneficiary is a Florida resident and intends to make the home their permanent residence. Third, the debtor beneficiary may be able to disclaim his or her interest in the home. This is a way of saying no thank you to the bequest. In these cases, the debtor beneficiary is treated as dead and the bequest is distributed pursuant to the parent’s probate estate or trust. This is not an option for a debtor beneficiary going through bankruptcy. Fourth, an option which only partially solves the problem, works if there are other beneficiaries, in addition to the debtor beneficiary. With this option, all of the beneficiaries can go to court to seek to have the home subject to partition. This would divide the home into partial interests so that only the debtor beneficiary’s portion is subject to the debt.
The best solution would be for the parent to not leave the home directly to the debtor beneficiary in the first place. Besides an outright disinheritance, this can be done by using a trust with a spendthrift provision for the debtor beneficiary. This would allow the debtor beneficiary to receive something of value (perhaps an income interest or a fixed monthly sum) without making the entire inheritance subject to the judgement creditor. If you are planning on leaving your house, or any other asset, to an individual who has a judgment against them, you should contact an experienced estate planning attorney to develop a plan to determine the best way to do so to avoid paying the beneficiary’s judgment.