The Unfortunate Reason You Might Have To Return Part Of Your Inheritance

Even if it is not a million dollars, receiving an inheritance can be a financial blessing. A bit of inherited money can help pay down debt or pad an emergency fund, whereas inheriting a brokerage account can give you a head start in preparing for retirement. But estate matters don't always work out smoothly, and you can end up being forced to return a part of your inheritance. This can happen if you, as a beneficiary, sign a refunding bond and release before distribution. In estate law, a refunding bond and release is a legal tool that compels beneficiaries to repay a portion of the assets they inherit if the estate is not capable of covering its debts or tax obligations.

Typically, any distributions to beneficiaries are only made after a waiting period, which varies by state. This period allows creditors to settle debts and legal disputes with the estate. If you've signed the refunding bond, and any creditors make legally valid claims after this period (or if the executor made distributions before all creditors could come forward), you may be legally obligated to pay back a portion of your inheritance to settle these claims. 

You may think that not signing a refunding bond will help you avoid giving back part of the distribution you receive. However, these forms are legally required in some states. Even when refunding bonds are not mandatory, lawyers may advise executors to get the beneficiaries to sign them. 

The easiest way to avoid the financial shock of returning an inheritance is to not spend the funds immediately. In fact, spending your inheritance, especially on extravagances, is one of the things you should never do after receiving a large amount of money. Most states have statutes of limitations, which vary in duration based on the state and the type of debt. Once the statute of limitations is up, creditors that didn't come forward earlier generally cannot make claims against the estate. By holding on to your inheritance for a while or investing it in assets that are more or less liquid, you can more easily repay any money needed to settle claims against the estate if they arise.

Now, if you're planning your estate and are worried about your loved ones having to part with their inheritance, it may be worth working with a lawyer to write the will or trust. They may recommend ways to protect your beneficiaries; for example, they may suggest a spendthrift trust. A spendthrift trust is a legal tool through which the assets belong to the trust itself and are gradually released to beneficiaries on a preset schedule. Through this vehicle, the estate must still settle with creditors, but the latter won't be able to go after a beneficiary's assets to claw back a debt. This type of trust offers a good way to protect your loved ones from unforeseen financial claims against the estate.