What Happens to my Debts When I Die, Part 3: Asset Protection

Probate is essentially a state-mandated mechanism to make sure your estate pays all of its creditors before paying its beneficiaries. So, in order to make sure your estate's assets don't get substantially depleted by creditor claims, you'll need to reduce the size of your estate. There are a number of ways to do this, and some of them are the same strategies used to avoid estate tax penalties.

First, you could invest your assets in retirement accounts, transfer-on-death accounts, and life insurance. All of these accounts are considered non-probate assets - as in, not part of your estate, so not subject to your estate's creditor claims. These assets transfer immediately upon your death and can be a practical and simple solution to potential creditor claims.

Next, you could utilize irrevocable trust-based planning which will remove your assets from your legal ownership and control. If you don't control your assets, your creditors cannot make a claim against them after you die as they're not part of your estate.

You could also create a holding company for your assets and transfer legal title of them to the company. This method is similar to the use of irrevocable trusts. Remove your assets from your legal control and you can avoid having them in your estate.

You can also plan to use life insurance to pay off outstanding debts. For instance, if you know you've got $50,000 in student loan debt, you could get a term life police for $50,000 (or more) in benefits specifically to pay the student loan debt and avoid having that amount taken from your estate. People can also use life insurance to pay anticipated estate tax penalties.