Potential Inheritance Risks During Bankruptcy

One aspect of Wills and Estates law that is rarely considered is that a bankrupt person who inherits from a deceased estate may be forced to relinquish all or part of their inheritance to pay off the debts that led to their bankruptcy.

Generally speaking, if a bankrupt person has after-acquired property, then these assets will be either be sold or used directly towards the outstanding debts.

It is important to understand these risks if you are either:

• a bankrupt or soon-to-be bankrupt person who believes they may become a beneficiary to a deceased estate during the bankruptcy period; or
• a person bequeathing your estate to a bankrupt or soon-to-be bankrupt person,

as the inheritance will not be protected and it can be used to meet an agreement made between the bankrupt beneficiary’s creditors and the bankruptcy trustee.

What is “after-acquired property”?

The concept of after-acquired property is set out in section 58 of the Bankruptcy Act 1966. It is the term used to describe any asset or assets that the bankrupt person comes to possess during the bankruptcy period.  A bankrupt may acquire property by purchasing it or receiving an inheritance.

In most cases, a bankrupt’s after-acquired property will vest in their Trustee in bankruptcy in accordance with section 58 of the Bankruptcy Act 1966. A person the subject of bankruptcy must disclose to their Trustee in bankruptcy details of any after-acquired property. If they fail to do so within 14 days of becoming aware of it, it will never ‘revest’ to the bankruptcy and will indefinitely remain under the control of the Trustee in bankruptcy, even if the bankrupt has already been discharged from the bankruptcy.

How can I prevent my estate from being lost to the bankrupt beneficiary’s debts?

Planning many years in advance can be difficult, particularly if you are trying to tie up loose ends and get your affairs in order. However, there are a couple of ways to update your Will that will allow the bankrupt beneficiary to receive the portion of the estate you intend to leave them without the assets being used to pay back creditors.

One such way is to amend your Will in a manner that excludes the bankrupt person for the standard bankruptcy period (three years and one day). After this time, when the bankrupt person has been discharged from their bankruptcy, then the Will can be amended so that the bankrupt person can once again benefit from the estate.

If you are concerned that the standard bankruptcy period will not end before you pass away, you can amend your Will to leave your assets to a discretionary testamentary trust, which means the bankrupt person can be a beneficiary, and whether funds are distributed to them during the bankruptcy period will be at the discretion of the trustee.

Assets held in a discretionary trust, where the bankrupt person is a beneficiary under the trust, will not form part of the bankrupt estate unless the trustee makes a distribution to the bankrupt person during the bankruptcy period. So, depending on the agreement the bankruptcy trustee has made with the creditors, this may mean all of the trust funds will go directly to the bankruptcy trustee.

If a person names a bankrupt or soon-to-be bankrupt beneficiary in their Will, the inheritance is considered to be after-acquired property, which will be dealt with by their bankruptcy trustee.

Ultimately, it is the decision of the holder of the Will to bequeath their estate to whoever they wish and if they choose not to amend their Will in a way that means the bankrupt or soon-to-be bankrupt person will have access to the assets themselves, then there is little that can be done.

If you need advice on how to include a bankrupt or soon-to-be bankrupt person in your Will, please contact one of our experienced wills and estate lawyers in Cairns.