April 29, 2015

Receipt of an inheritance usually has mixed emotions for recipients.  On the one hand, there is sadness because usually a loved one has died, precipitating the administration of that estate.  On the other hand, there is happiness at receipt of a financial resource not necessarily planned on and received almost as a windfall.

But for some beneficiaries, there can be other more unfortunate emotions.  If a beneficiary is bankrupt, then the bankruptcy legislation requires that any inheritance should be paid to the trustee in bankruptcy.  The bankrupt person takes any surplus after the creditors have been paid and the trustee’s costs and the costs of bankruptcy administration have been deducted.  If a bankrupt beneficiary were to receive an inheritance, that “after acquired property” would still vest in the bankrupt’s trustee in bankruptcy for division among the bankrupt’s creditors.

Over recent years, certain bankrupts have failed to disclose receipt of inheritances in order to avoid having to hand over the benefit to their trustee in bankruptcy.  Unfortunately for them, the trustee in bankruptcy in each case found out about the receipt of funds from the respective estates. 

Not only did the bankrupt beneficiaries have to hand over the proceeds but they were also the subject of prosecution in the Magistrates Court.  Each bankrupt person was convicted and penalties varied.  One was fined.  One was ordered to perform community service and another was sentenced to imprisonment but due to age and health issues, he did not have to serve any period of incarceration.

These beneficiaries learnt a lesson the hard way.  

Moreover, executors should beware contemplating doing a deal with a bankrupt beneficiary in the deceased estate whereby the beneficiary loses his/her entire entitlement in the estate.  This would be under the guise of settling a family provision application against the deceased estate by an eligible person.  The bankrupt beneficiary would then avoid making any mention of the entitlement to their trustee in bankruptcy.  Such action, designed to defraud creditors, can render the executor also liable to prosecution.

To avoid such a situation occurring, careful estate planning is required.  If people wish to leave benefits to beneficiaries who are subject to financial risk (eg running their own businesses), then strategies can be adopted whereby the risk of that particular beneficiary receiving the benefit absolutely at a time they are bankrupt can be reduced.

Please contact us if you require any further information.