Protecting Inherited Wealth from Creditors and Litigation

Executive summary 

• Creditors, unresolved tax liabilities, and litigation from other interested parties can pose significant threats to the inherited wealth of an estate’s beneficiaries.
• Steps are available during the estate planning process to help you protect your assets from potential litigation.
• Some options for protecting inherited wealth include creating a trust, utilizing a family limited partnership, or establishing a limited liability company, among others. 
• Maintaining privacy around an estate by using a trust or including alternative dispute resolution methods in entity-formation documents can help protect an estate from the public eye and can also help avoid publicly airing disputes in the courts. 

Introduction

For estates of high-net-worth individuals, protecting wealth for their heirs and successors is paramount. Some of the biggest threats to inherited wealth include creditors and litigation.  How an individual structures their estate plan can make all the difference in ensuring that assets are protected. 

For example, creditors can not go after beneficiaries once assets have been transferred to them and the property no longer belongs to the decedent’s estate. If you have an estate plan that requires assets to go through probate, then it’s likely that the value of these assets can be targeted by creditors to resolve debts.

Understanding what steps to take in your estate planning or as an interested party in an estate after the death of a decedent can put you in a position to maximize the protection of the estate’s interests and assets and the share of an inheritance that beneficiaries receive.

The risks to inherited wealth

Creditors and debt collection

Creditors are parties who were owed debts by the decedent at the time of their passing. Creditors have a right to seek collection of their debts from the estate, and this is a specific step built into the probate administration process. During probate, creditors have a designated time period in which they can submit a claim to the estate to resolve their debts. 

In California, this process lasts about 180 days. In Texas, this timeline is similar—about four months. Once creditors submit their claims to the estate, the executor is then responsible for accepting, rejecting, or resolving the debts through settlement. Creditors may also pursue litigation in order to have these claims settled if they feel they have been unfairly or insufficiently addressed. 

If you have outstanding debts, any assets that pass through probate can be targeted by creditors. The common way to bypass this and protect specific assets is to transfer their ownership into a trust or to another beneficiary during your lifetime.  However, caution should be used in transferring ownership to avoid being accused or fraudulently transferring assets to avoid payment of a debt or judgment.  

Lawsuits and divorce

Lawsuits against the estate can serve as a potential source of risk for targeting an estate’s assets. This is often common in cases of divorce. For example, if an individual had a prenuptial agreement with a spouse and then left that spouse out of their estate plan, that spouse may be able to pursue litigation against the estate for a specific share of the assets on the grounds that the contractual agreement was left unfulfilled.

Surviving spouses have unique rights to the estate of a decedent spouse. However, divorce may throw a wrench into estate plans if a previous spouse was not removed from a will or a new spouse was never added.  While certain default provisions of the Probate Code alter a former spouse’s status in certain estate planning documents in California when a divorce occurs, other disputes may arise over the rights of the former spouse that can lead to litigation.  

If a potential lawsuit does arise, it’s a good idea to consult a skilled probate litigation attorney who may be able to facilitate alternative dispute resolution methods like negotiation or arbitration to prevent full-scale litigation. 

Tax liabilities

Taxes are an important consideration in the probate process, as an estate is still liable for taxes after a decedent passes away. These tax liabilities depend largely on the structure of the estate and how assets are set to be managed after an individual’s death. 

Neither California nor Texas collects estate or inheritance taxes, but there is a federal estate tax that individuals should consider. The federal estate tax exemption is $13.99 million in 2025, so high-value estates are liable for a percentage of the value of the estate over that amount. This percentage ranges between 18 and 40%. 

There are some steps that heads of an estate can take during estate planning to take advantage of the federal exemption and reduce the size of the taxable estate. An experienced tax professional can provide more guidance in this area.

Legal strategies for protecting inherited wealth

Protecting inherited wealth largely lies in the hands of the head of the estate during the estate planning process. Some of the following strategies can help protect wealth for their beneficiaries and heirs.

Create a trust for asset protection

Creating a trust is a helpful way to organize and compile assets under a single umbrella. A trust helps transfer ownership of designated assets from the estate into the hands of a third party known as a trustee. 

With a revocable trust, the trustor is still considered the owner of the assets, which means that trust assets may be subject to claims from creditors or potential lawsuits. However, an irrevocable trust may be able to provide that layer of protection against both risks, as it places legal ownership of the assets into the hands of the trustee. 

Although there are some instances where judgment creditors recover money from a trust according to California Probate Code 15306.5, there are limitations on the amount that a judgment creditor can collect. It’s helpful to consult a trust litigation attorney to better understand your options and how to navigate disputes raised by creditors. 

Utilize a family limited partnership (FLP)

A family limited partnership is another option for protecting estate assets by grouping the assets into a structure that allows for joint ownership amongst all interested family members who are considered partners. In this type of partnership, assets are pooled under a singular entity rather than being considered the property of each individual party. 

Under this arrangement, all parties in the FLP have interests in the estate assets, which shields them from being pursued by creditors due to personal debts. An FLP also offers the advantage of reducing the size of the taxable estate and keeping the respective property in the family without the need for probate. 

Establish an LLC (Limited liability company)

A limited liability company (LLC) is another entity that can be used to shield your assets from creditors. An LLC option is designed to protect your assets from personal liability, so if assets are held in an LLC, then creditors cannot pursue a portion of these assets for your own personal debts. 

Establishing an LLC with multiple partners is also a great way to have these partners maintain ownership of these assets, having them act as beneficiaries. An LLC is similar to an FLP, except with different tax designations, and the interested parties do not have to be family members. 

Designate beneficiaries and keep assets separate

Designating beneficiaries for insurance or accounts can keep property separate from the overall estate in order to protect it from probate and the risk of creditors or litigation.  At death, assets held by a brokerage account or savings account, will be transferred to the named beneficiary on the account and will not pass through probate.  

You can designate beneficiaries for some of the following assets: 

• Life insurance policies
• Transferable-on-death or payable-on-death bank accounts
• Jointly-owned assets, like real property

Keep in mind that designating beneficiaries for some assets is different from others. For example, when beneficiaries are specified in a will, the assets must still pass through the probate process before ownership can be transferred. In the above cases, however, these non-probate assets can bypass the lengthy process. 

Estate planning for inherited wealth protection

Thoughtful and strategic estate planning is an essential tool for protecting inherited wealth. The following estate planning tools are useful for protecting your wealth for your descendants and heirs.

Wills and trusts in estate planning

Wills and trusts are valuable estate planning tools to guide the administration of an estate upon one’s death. A will is a document that outlines all of the assets that exist in an estate, who the beneficiaries of these assets are, and how much of them each should receive. 

A will must pass through probate in order for the document to be validated by the courts and for the distribution of assets to take place. On top of coordinating estate administration, a will may also outline how to address and account for outstanding debts, such as designating a specific portion of the estate to resolve any debts, in order to simplify estate planning. 

Meanwhile, a trust places ownership of assets into the hands of a trustee, allowing assets to avoid the probate process. The trustee will then be responsible for overseeing all assets, managing them responsibly, and then distributing them to the relevant beneficiaries. 

Placing assets in a less creditor-friendly jurisdiction

High-net-worth individuals with valuable estate and considerable assets to protect often have assets in multiple states or even countries. Creditor rights and claims generally depend on the laws of the jurisdiction where the assets are located, which can directly impact an estate and its assets.  

If creditors are in a creditor-friendly state or country, they may be able to pursue claims more easily. For example, in California, creditors are given ample time to file a claim for repayment and have them addressed. 

Meanwhile, in a debtor-friendly jurisdiction, creditors have fewer avenues to seek the repayment of debts, and estates have more exemptions that can be used in their favor. For example, in Texas, Homestead laws prevent creditors from seizing the primary residence of an estate if they are not the lienholder or mortgage company servicing the property—these laws protect a valuable estate asset from falling into creditors’ hands. 

Individuals looking to protect their inherited wealth may consider establishing a trust or handling their estate planning in a debtor-friendly jurisdiction where it is more difficult for creditors to take action against an estate. In these cases, you should consult experts like a financial advisor, tax advisor, and an estate planning attorney. 

The role of powers of attorney 

A power of attorney is an arrangement that places the ability to make decisions on behalf of another party into the hands of a trusted individual. This person, known as an “agent” or “attorney-in-fact” can be relied upon to make decisions in line with the interests of the protected individual in situations where a person is not able to themselves, such as a medical event or mental incapacity. Designating a power of attorney can prevent decisions from being made that compromise the interests of an individual who serves as the head of an estate. 

An agent under a power of attorney can make decisions to protect your assets from creditors in cases where you are unable to. For example, they can make decisions, send gifts to beneficiaries, operate business interests, and conduct transactions. These actions can reduce the size of an estate and the overall value of assets targeted by creditors.

An agent will not be able to make decisions after the protected individual’s death, but they can help manage assets to lower the risk of the estate being taken advantage of by creditors.

Planning for estate taxes and probate

Effective planning can reduce estate taxes and expedite the probate process by altering the size and liability of the estate. Some steps you can take to minimize tax liabilities during the estate planning phase include:

• Gifting assets during your lifetime within the federal tax exemption.
• Establishing joint ownership of assets with beneficiaries during your lifetime to reduce the size of the overall estate and allow for them to maintain ownership of these assets.
• Creating an irrevocable trust to reduce the size of the estate.
• Placing assets into the ownership of a limited liability company (LLC).
• Transferring assets into a family limited partnership to reduce the size and ownership of your estate.
• Utilizing charitable giving to non-profit organizations.

However, taxes facing estates can be significantly nuanced and lead to unique questions based on the specific regulations of the state or locality where the estate exists. It’s always a good idea to consult with a professional tax advisor in order to understand your estate management options and which steps you should take to best protect your assets.

Insurance options to protect inherited wealth

Insurance policies and targeted benefits can be used as methods for protecting estate interests and safeguarding inherited assets from creditors, legal claims, and other risks. The following policies may be helpful to consider for added security for your estate and its assets. 

Life insurance with a trust

Life insurance with a trust means that the policy payout from a life insurance benefit will be grouped into a trust and managed by a third-party trustee instead of going to a single beneficiary or being lumped in with the estate. This approach ensures that these assets are exempt from probate and can be given to clearly established beneficiaries identified in a trust instrument. 

A life insurance with a trust works similarly to a standard life insurance policy, except instead of the payout going directly to a single beneficiary, it is transferred into a trust for the trustee to handle. Once the benefit from the policy is placed into the trust, it is up to the trustee to distribute the benefit to beneficiaries in line with the policyholder/trust creator’s wishes. 

Umbrella insurance policies

Umbrella insurance policies help protect your assets from liability by providing an additional safety net beyond specific coverage, like life or property insurance. These policies are a good idea for protecting assets in case of an unforeseen event where specialized insurance policies are not enough to cover and reimburse the full financial value of certain assets.

For example, if a weather event damages one of the deceased’s residences, but the home insurance policy only covers up to a certain amount, an umbrella insurance policy can cover the difference. This can prevent further expenses from being funneled out of the estate and ensure that the heirs to the property receive a fair value for the property upon their inheritance.

Maintaining privacy to protect inherited wealth

Privacy is often the best policy when it comes to protecting inherited wealth. When an estate becomes a matter of public record, it can complicate the process by disclosing excess information that may lead to disagreements or disputes. Fortunately, there are a few steps that the head of an estate and other interested parties can take to prevent this from happening.

Keeping inheritance information private and limiting public disclosure of inherited wealth

Keeping inheritance information, such as beneficiary information, asset distribution percentage, and estate asset breakdown, private will help to minimize the potential for unwarranted and unwanted disputes from creditors or other interested parties. The number one way to keep inheritance information private is to avoid probate entirely, which is a public court process that leaves documents in the public record.

Limiting public disclosure of inherited wealth can prevent other parties from being made aware of the size and scope of the estate’s assets. With limited public disclosure, fewer people are able to track down how much heirs stand to inherit or will inherit—this will reduce the likelihood of creditors looking to raise litigation to secure a portion of that inheritance.

Some ways to limit public disclosure of inheritance include:

• Utilizing a trust to avoid probate.
• Providing trustees with the discretion to distribute assets to beneficiaries when they reach the age of majority or a stable financial situation.
• Leaving a clear will or trust instrument to minimize the risk of litigation, which is public record.
• Using alternative dispute resolution methods to resolve disputes and avoid litigation.
• Discussing your estate plans only with trusted individuals.
• Encouraging beneficiaries to keep their inheritances private and consult a financial advisor.

Working with professionals to protect inherited wealth

It’s a good idea to work with professionals who can ensure that inherited assets are properly safeguarded against creditors or potential lawsuits. Professionals may be able to look at the unique nuances of your estate, such as its size and the value of the assets within it.

Consider consulting some of the following experienced professionals:

• Estate planning attorneys
• Financial advisors
• Tax professionals

Each of these professionals can offer guidance around the estate planning process, providing insight into how you can structure your estate to protect it from creditors or disputes. For additional support during the probate process, consider consulting an experienced probate litigation attorney who can help protect the interests of an estate against potential lawsuits or disputes.

Take steps to protect inherited wealth

High-net-worth individuals justifiably want to protect the wealth they leave for their beneficiaries and heirs. With the help of the right advisors and experts, individuals can take valuable steps to protect their wealth through conscientious estate planning. Once you enter the probate process, it’s important to have the proper support against litigation and other potential disputes that may arise.  

Our probate estate litigation attorneys at RMO can help with claims against an estate that arise during probate. Our team of attorneys has decades of experience in probate litigation. If you are a beneficiary, executor, or trustee in the midst of the probate process, we will advocate for the interests of the estate to protect a designated inheritance. 

If you are considering how to best structure your estate plan to plan for these issues, we may be able to help identify specific gaps and potential disputes that may arise, and advise on how best to prevent them. 

Schedule a consultation with our team to learn more about how our attorneys at RMO can help.