Dealing with a bankrupt beneficiary

Acting as a personal representative carries with it significant responsibilities, especially when it comes to distributing the deceased’s estate to the right beneficiaries. Below we look specifically at the rules relating to bankrupt beneficiaries, together with the potential consequences of getting this wrong.

What happens if a beneficiary is bankrupt?

When dealing with the estate of someone who has died, either as a named executor of the deceased’s Will, or as an administrator where a person has died intestate, it’s important to check whether any of the beneficiaries have been declared bankrupt. This is because, where a person has been made bankrupt, any assets to which a beneficiary would otherwise be entitled should not be handed over directly to the bankrupt beneficiary, but to the trustee in bankruptcy instead.

The trustee will essentially take over the financial affairs of the bankrupt individual, including taking control of any inheritance received where, with the exception of paying that person any living expenses, these funds will be used by the trustee to pay off creditors in order of preference.

What are the consequences of distributing assets to a bankrupt beneficiary?

The executor or administrator of an estate has a legal duty to distribute the residuary estate to the right beneficiaries. This would normally be the named beneficiaries under the terms of any Last Will and Testament or, alternatively, those beneficiaries entitled to inherit under the rules of intestacy.

However, in the context of any bankrupt beneficiary, the correct person to which any funds should be given becomes the trustee in bankruptcy, not the beneficiary themselves.  As such, if an executor or administrator mistakenly distributes all or part of the deceased’s estate directly to a bankrupt beneficiary, and that beneficiary refuses or is no longer able to return the money, the trustee could bring a claim against them to recover the amount paid. In other words, where a personal representative pays the wrong person, and that money cannot be recovered from that person, the personal representative will become accountable.

A bankrupt beneficiary is under a duty to declare their inheritance to the trustee in bankruptcy, where any failure to do so constitutes a criminal offence. However, it is easy to envisage cases where a beneficiary, unexpectedly in receipt of funds that they thought would be swallowed up by their bankruptcy, may decide to conceal their sudden windfall and/or spend it before the mistake is discovered. In this scenario, the executive or administrator would unfortunately be held liable for the unrecovered sums, in addition to the trustee in bankruptcy’s legal costs in claiming this back.

How can a personal representative avoid liability around bankrupt beneficiaries?

The best way to avoid liability around bankrupt beneficiaries is to seek legal advice, costs which can be recouped by an executor or administrator from the deceased’s estate. In this way,  experienced solicitors can undertake the task of establishing whether any beneficiaries are undischarged bankrupts at the time of the deceased’s death, or if any beneficiary was made bankrupt before the estate administration was finalised. If so, any legacy should be paid directly to the trustee in bankruptcy.

Only if the amount passed to the trustee in bankruptcy exceeds the amount owed to the bankrupt’s creditors, can anything be paid to the beneficiary. However, even in these circumstances, everything should still be paid over to the trustee, tasking them with paying any remaining sum to the beneficiary.

Legal disclaimer

The matters contained herein are intended to be for general information purposes only. This blog does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. Whilst every effort is made to ensure that the information is correct, no warranty, either express or implied, is given as to its’ accuracy, and no liability is accepted for any errors or omissions. Before acting on any of the information contained herein, expert advice should be sought.