Legal Tip 99: Inheriting while bankrupt

Death often is timed badly.

If a person in bankrupt at the time of death of a person that leaves them assets then that inheritance will be taken by the trustee in bankruptcy i.e. it will go to satisfy you bankruptcy debt. A person remains bankrupt for 3 years generally. A lot can happen in 3 years.

Similar if you inherit before becoming bankrupt.

How to prevent this? ideally you would talk to your parents and others you suspect will leave money or property to you, and ask them to incorporate a discretionary testamentary trust in their wills. You can then be a beneficiary of the trust, the assets of the trust will be safe while you are bankrupt and then you can start to receive income and/or capital once you are out of bankruptcy.

Sometimes it will be too late for a parent to change their will. They may have lost their capacity already for example. In these cases it is possible to apply to the courts to have a court made will or for a court to amend their existing will. Recent cases have allowed a testamentary trust to be incorporated into a will on application to the court - but there are other cases where this has been refused. So a court application may or may not be successful. It will also be costly so plan ahead.

Where a person is bankrupt and there is a death expected while they are still bankrupt one other strategy may be to make an offer to creditors to release you from bankruptcy upon a special one off payment arrangement. This can be done by borrowing money from family. But it must be done before the death otherwise the trustee in bankruptcy will inherit in the place of the bankrupt. Delaying probate will not assist either as the estate is yours at the date of death once the will has been admitted.