How does bankruptcy affect an inheritance?

2 Jun 2014 | Comment


Eleanor considers the effect that bankruptcy can have on an inheritance.

My team at Hugh James deals with a large number of probate and estate administration cases.  Occasionally, we encounter an executor or beneficiary of an estate who has been declared bankrupt.  It is important to be aware of the practical steps that need to be taken to deal with this situation, and to protect against the risk of distributing money from an estate to the wrong person, if a bankruptcy order is in place.

There are two main issues that need to be approached properly when considering bankruptcy in an estate administration context: firstly, although it is not impossible, it is not advisable for a bankrupt person to act as an executor or trustee.  Secondly, a beneficiary of an estate who is bankrupt may not be entitled to receive their inheritance from the estate, as it may need to go towards the payment of their debts under the bankruptcy.

It is technically possible for a bankrupt executor to apply for a grant of probate.  However, it could be impractical if the bankrupt executor acts in the estate, as he may be unable to do certain things such as sell the deceased’s property.  From a more personal perspective, the beneficiaries of the estate might have some concerns about a bankrupt being the person entrusted with the assets of the estate, as there could be an inference that the bankrupt may not be very good at handling money.

This means it is important, when starting work on an estate, to check whether the executors are bankrupt.  A straightforward search can be carried out against the Land Charges Register for a small cost to check whether there is a bankruptcy order in force against an individual.  If an executor is bankrupt, the circumstances of the estate will need to be considered and advice provided to the executor, to ascertain whether the executor is going to continue to act, or whether it is better for the executor to renounce probate (give up his role as executor) or have power reserved to him as an executor (take a back seat in the administration of the estate).

When it comes to beneficiaries of an estate, it is important to make a bankruptcy search to check whether or not there are any bankruptcy orders in place, before distributions are made to the beneficiaries.  If a beneficiary is indeed bankrupt, their inheritance, or part of it, may be due to the trustee in bankruptcy and not the beneficiary.

Individuals who are bankrupt have a duty to inform the trustee in bankruptcy of any property they become entitled to after the date of the bankruptcy.  You would hope, therefore, that if a beneficiary became aware of their entitlement under an estate, they would inform the trustee in bankruptcy, and the executor of the estate (and solicitors acting on the executor’s behalf) would be made aware of the situation.  Unfortunately, this does not always happen.

If the executor (or their solicitor) failed to check if a beneficiary was bankrupt and paid the inheritance directly to the beneficiary, the trustee in bankruptcy would be entitled to sue the executor or solicitor for the amount paid to the bankrupt beneficiary.  A bankruptcy search should, therefore, always be undertaken before distributions are made.

When the result of a bankruptcy search shows a beneficiary has been declared bankrupt, it is advisable to contact the trustee in bankruptcy to check how the inheritance is to be paid.  Sometimes, the trustee in bankruptcy will confirm that the bankruptcy order is no longer in force and it is safe to distribute to the beneficiary.  The reason this could happen is that entries on the Land Charges Register show bankruptcy orders made in the last five years.  A bankruptcy order will usually last for one year (but could last longer).  If the bankruptcy order is still in place, the trustee in bankruptcy will usually serve notice to the beneficiary to confirm that the payment should be made to the trustee in bankruptcy.

When a beneficiary is under an Individual Voluntary Arrangement (IVA), the situation is different.  Usually, a beneficiary under an IVA is still entitled to receive their inheritance and the executors or their solicitors can pay the inheritance to the beneficiary.  It is always necessary to check whether a beneficiary who has an IVA has also been declared bankrupt, however, as sometimes an IVA will be effected after a bankruptcy.  A search of the Individual Insolvency Register will reveal whether a beneficiary is under an IVA.  It is prudent to report any distribution to the Supervisor of the IVA.

If a beneficiary lives overseas, a bankruptcy search of the Land Charges Register will reveal any bankruptcy orders made in England and Wales but not any made overseas.  It is necessary to seek advice from a lawyer in the relevant country to ascertain the applicable rules regarding bankrupt or insolvent beneficiaries.

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