What Happens if a Beneficiary is Bankrupt?
15 November 2017
When someone dies, if part (or all) of their Estate is set to be inherited by a beneficiary who has been declared bankrupt, it will directly impact on how that beneficiary is able to inherit. The inheritance must be disclosed and will be used to pay off outstanding debts before being passed to the beneficiary.
Any attempts by the bankrupt beneficiary or the Executor of the Estate to hide the inheritance will be unlawful and can have serious repercussions for both individuals.
Responsibility of the Executor
As an Executor of an Estate you are responsible for ensuring that any inheritance due is paid or transferred to the correct person. However did you know that if a bankruptcy order is in place, then payment of inheritance or transfer of assets, such as a house, direct to the beneficiary is distribution to the wrong person?
If a beneficiary is bankrupt their inheritance should be paid to their Trustee in Bankruptcy.
What is a Trustee in Bankruptcy?
Bankruptcy orders are placed on individuals that have applied for bankruptcy following the Insolvency Act of 1986 and usually last for one year.
The Trustee in Bankruptcy is an official that will be appointed by the Courts when the bankruptcy order is put in place, and is also known of as an Official Receiver. The Trustee in Bankruptcy arranges payment of outstanding debts to any creditors and the Trustee will also take a bankruptcy administration charge for themself.
If the Executor of the Estate distributes an inheritance directly to a bankrupt beneficiary, then the Executor of the Estate could then be held personally liable to make payment to the Trustee in Bankruptcy, on behalf of the bankrupt person’s creditors.
The amount that the Trustee in Bankruptcy would claim from the Executor would be either the amount of the payment that was made to the bankrupt beneficiary, or the value of the assets transferred to the bankrupt beneficiary.
Responsibility of the Bankrupt Beneficiary
Under the Insolvency Act of 1986, bankrupt beneficiaries are required to make their Trustee in Bankruptcy aware of any inheritance they become entitled to receive during the period of their bankruptcy. This applies whether or not they then receive that inheritance during the time that the bankruptcy order is in place.
Beneficiaries that fail to inform the Trustee in Bankruptcy of inheritance that is due to them may be prosecuted in a Magistrates Court. Again, the Executor of the Estate can then be held personally liable for the payment that needs to be made to the Trustee in Bankruptcy, on behalf of the bankrupt’s creditors.
Beneficiaries that are bankrupt should still receive inheritance that is due after creditors and administration charges under the bankruptcy order have been settled. This is arranged by the Trustee. No attempts should be made by a beneficiary or Executor of the Estate to hide an inheritance. Any attempts to do so will be breaking the law.
It is simple to check if a beneficiary is bankrupt via an online search at the Land Registry. Co-op Legal Services checks all beneficiaries at the start of the Estate administration process and again before distribution of an inheritance is made.