Insolvent Beneficiaries Beware

Steve ElliottPosted 21 October 2015 By Steve Elliott, Business Recovery and Insolvency Partner In Business Recovery & Insolvency

In my 25 years as an Insolvency Practitioner, I have twice had the misfortune of claiming inheritances from bankrupts. That is two too many in my book, and it saddens me that both could possibly have been avoided.

I should make it clear from the outset that this is not a question of putting assets beyond the reach of a bankrupt’s creditors.   They have a potential entitlement but nothing more; the benefactor is perfectly entitled to change their mind and leave their worldly belongings to whomever they choose.

Nor do I make any judgment on the bankrupt’s moral obligation to repay his or her debts.

Pre Insolvency

An individual with severe financial difficulties should ideally talk to anyone who’s Will they might feature in.  They could then either seek to be excluded from the estate, or ensure that the Will includes a fully discretionary trust, often called a “Spendthrift Trust”, to protect them as a “fragile beneficiary”.

Bankruptcy

Understandably, the majority of bankrupt’s simply do not, or cannot, deal with the matter in advance.  Insolvency and death are both extremely sensitive and difficult subjects to broach, and they commonly do not even know that they are named in a Will. 

That exposes them to the provisions of Section 307 of the Insolvency Act 1986 whilst they remain an undischarged bankrupt, typically a period of twelve months.   Even if the bankrupt does not discover the legacy until some time later, the relevant event relates back to the date of death. If that is within the twelve months, then the Official Receiver or Trustee will claim the inheritance for the benefit of creditors.

Executors are therefore advised to ensure that their solicitors perform a bankruptcy search before distributing an estate.  If they fail to do so, then they risk being sued for recovery of any funds released to the bankrupt.

Overall, a very thorny and emotive subject, and not one that I wish to experience again. The message, as is often the case, is to seek advice and plan ahead; it is too late once bankruptcy takes effect.


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