Bankruptcy and inheritance: who gets what and what you can do about it

12 September 2016

The potential for bankruptcy to affect a beneficiary under a deceased estate poses significant problems for inter-generational wealth planning.

When a beneficiary to a deceased estate is bankrupt, their inheritance is made available to creditors to meet the costs of the trustee and the administration of the bankrupt estate. Any property acquired by the bankrupt beneficiary from the deceased estate becomes “after-acquired property“.

In these circumstances, there is the temptation not to declare the after-acquired property to the trustee or to enlist the support of the executor and other beneficiaries to “do a deal“, which would have the effect of eliminating or deferring the interest of the bankrupt in the estate. Giving in to either temptation would constitute offences exposing the bankrupt and/or the complicit executor to prosecution. Penalties can vary depending on the circumstances and range from fines to imprisonment.

Of course once the will maker has passed, “the die is cast” and events are put into motion whereby the interests under the will are distributed in accordance with the will, regardless of whether the beneficiaries are bankrupt or not. However, with some foresight and careful planning, a will can be structured so that the potential for the will-maker’s estate passing to a trustee in bankruptcy can be avoided.

Forward planning is key because, once an interest vests, it’s too late to put the genie back in the bottle. If you have potential beneficiaries who are at a high risk of bankruptcy because, for example, they have their own business, you should consider taking legitimate steps to protect what they may stand to inherit from you from their creditors.

If the subject matter of this article affects you or you would like to discuss other estate planning issues, please contact us on 3007 3777.