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If you are going into retirement, something that you might be considering is eliminating any of your outstanding debts. Part of the issue that people run into during retirement is that they may not have as much income as they had in the past. As a result, paying the debts that accrued earlier in life may not be as easy as it was before.

If you find that you've fallen behind, then one option may be to file for bankruptcy to get a fresh start. If you can pass the Chapter 7 bankruptcy means test, then you may be able to have your unsecured debts discharged after going through the liquidation process.

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If you start looking into your estate planning, you know that it begins with dividing assets, but you may quickly realize that you have a lot of debt, as well. You plan to pay this off before you die or to declare bankruptcy or take care of it in some other fashion, but there's no guarantee.

If you pass away and still have debt, does that have to become part of your estate plan? Do your heirs need to pay your debt, and will they inherit it just like they would inherit your assets?

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If you have a substantial amount of money to leave your family in your estate plan, it's often wise not to leave it to them in a lump sum. This can have significant tax implications for them. If you have more than one child, they may each benefit from having a different type of trust, so it's a good idea to learn about the various types.

So-called “spendthrift trusts” are often used for people who need some supervision when it comes to money. A spendthrift trust is managed by a trustee who disburses money based on your instructions or (if you designate) at their own discretion. This kind of trust also protects a beneficiary's inheritance from being taken by creditors, plaintiffs in a lawsuit or a spouse in a divorce. That's because they don't legally have any control over the money.

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A trust is a legal arrangement whereby you give another party the power to control and manage your assets on behalf of a third party, usually your beneficiaries. For a revocable trust or living trust, the property you grant the trust remains within your control, and you may amend or revoke the terms any time you wish to do so. However, there are drawbacks associated with your control of the assets since the ownership remains under your name.

With an irrevocable trust, property under it transfers ownership from you to the trust. In addition, the terms cannot be easily modified or revoked once the trust is established. Depending on the size of your estate, it may be a beneficial form of estate transfer. There are benefits an irrevocable trust offers that a revocable trust does not. They include:

Protecting your assets

Since you do not legally own the property in an irrevocable trust, creditors cannot attach the said property to recover the debt. The same applies to the beneficiaries' creditors. As such, your estate is safe from repossession in case you default on debt. In addition, if the beneficiary gets a divorce, the property under a trust cannot be obtained from them to their ex-spouse.

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As you start your estate planning, you likely already know that one of your goals should be helping your estate avoid probate – or at least a long, complicated one that will put your loved ones through the added expense and stress at an already difficult time.

If there's anything worse than one probate process, it's two. That may be necessary if you own property in another state when you pass away. Property that's subject to probate has to be dealt with in a court in that state. That's called “ancillary probate.” (Probate in your home state is “domiciliary probate.”)

The good news is that state probate courts are typically amenable to cooperating with each other on ancillary probate proceedings. That can make things easier for your executor, who will need to initiate all probate. However, it's still important to make sure your executor knows about this out-of-state property. They may have to travel there to deal with it. Going up to Wisconsin is one thing, but if you also have a condo in South Florida you're planning to retire to, that can mean a lot of extra time and travel.

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