If the example below applies to you then you must adopt a trust or a will to solve the problem and protect your loved ones. If you know somebody who might be subject to the example below please forward this message to that person.
Derrick and Julie are married and have minor children. They own a home as community property (not community property with right of survivorship) with $300,000 of equity. Derrick has a $1,000,000 life insurance policy of which Julie is the beneficiary. They have a $300,000 car insurance policy.
Julie is driving the car and Derrick is a passenger. Julie is at fault and causes an accident that kills Derrick and a person in another car. Julie is sued by the family of the person who died in the other car. The plaintiff gets a judgment against Julie for $2,000,000. The car insurance company pays the plaintiff $300,000. The plaintiff gets the $1,000,000 of life insurance paid to Julie. Arizona’s homestead exemption protects the first $250,000 of equity in a resident’s home from creditors so the creditor only gets $50,000 from the home. The unpaid judgment is $650,000 and the creditor garnishes Julie’s wages and bank account. The creditor gets $1,050,000 from Julie.
Solution: Derrick and Julie should have created an estate planning trust that provided that when Derrick died a separate irrevocable trust (called a QTIP trust) would be created for Julie and all the life insurance and all of Derrick’s property would go into the QTIP trust. Julie would be the trustee and beneficiary of the QTIP trust. The QTIP trust would own the $1,000,000 paid to it by the life insurance company, one half of the home with a value to the QTIP trust of $150,000 and all of Derrick’s other assets. Because these assets are not Julie’s assets her creditor could not get any of the assets in the QTIP trust.
If Derrick and Julie had created this sophisticated estate planning trust Julie’s creditor would not taken $1,050,000 from her inheritance.
Note: This type of QTIP trust would protect the life insurance and all other assets owned by Derrick that he left in the QTIP trust regardless of how and when Julie got a creditor problem.