Impact of Debt and Creditors on Estate Planning
Let us examine how a person’s debt affects various estate planning instruments.
Insurance Nominations
According to the LIA guide to nominations, policy proceeds from a revocable nomination are not protected against claims from creditors. Conversely, policy payouts from trust nominations are protected against such claims.
Regardless, it is advisable to confirm this with your insurer, as there may be additional terms in the policy and/or nomination form that may affect this.
Wills and Testamentary Trusts
Assets that form part of the deceased's estate (including insurance policies paid to the estate such as when no nominations are made) will be subject to claims by creditors before the estate is distributed to the beneficiaries. Creditors typically file a caveat against the estate to make such claims.
A caveat acts as a formal notice that there is an interest in the estate. The court is required by law to give the person who has filed the caveat the opportunity to contest or challenge any application for a grant.
You may wish to seek legal advice if there are caveats in force against the estate.
A testamentary trust, established through a will and effective upon the testator's death, generally does not provide additional protection against the testator's creditors. When the testator passes away, their assets become part of their estate and are subject to the probate process BEFORE it is transferred to the testamentary trust. This means that before any assets are transferred to the testamentary trust, creditors could be paid from the estate's assets.
Living Trust
Whether assets transferred into an existing trust can be protected from creditors depends on the terms of the trust (e.g. whether it is an irrevocable trust and if full discretion is given to the trustee, including the ability to withhold any payout).
It is best to speak with the licensed trust company you engaged to be the trustee regarding this.
In Singapore, based on Singapore’s Restructuring and Dissolution Act 2018, Part 17 Administration in Bankruptcy, Division 6 –Effect of bankruptcy on antecedent transactions, if a person facing bankruptcy has made transactions that undervalue their assets or have given unfair preferences, these transactions may be examined if they occurred within specific timeframes before the bankruptcy application.
Additionally, the time frame may go beyond this if fraud is suspected.
This means that if a person deliberately transfers assets, such as putting money into a trust, to avoid paying creditors while being in debt, this transaction can be examined. If it is found to be an undervalue transaction or an unfair preference made within the specified timeframes before a bankruptcy application, it may be reversed or rescinded to ensure creditors are paid. This is to prevent individuals from shielding their assets unfairly and to ensure that creditors receive what they are owed.
As the cases will be dependent on your exact circumstances, do check with your insurer / relevant licensed trust company managing your trust regarding your specific circumstance. You may also consider seeking legal advice.