Inheritance Dilemmas: Handling Assets for Bankrupt Beneficiaries

Dealing with a deceased persons estate involves checking if any of the beneficiaries have been declared bankrupt. Mistakenly passing on inheritance to a bankrupt beneficiary may bring a claim against you. Importantly, the trustee in bankruptcy can recover any money that they were not able to retrieve from the beneficiary.

As an executor or administrator of an estate, your duty is to distribute the net estate to the right beneficiaries. Someone who has been declared bankrupt, has a trustee in bankruptcy who take over their financial affairs. Therefore any income gained by the bankrupt individual during that period is paid direct to the trustee.

The trustee provides the bankrupt individual with living expenses. Remaining funds are distributed to the creditors in order of preference.

When should an inheritance be paid to a trustee in bankruptcy?

The estate executor or administrator pays the inheritance directly to the trustee in bankruptcy, when the beneficiary is an undischarged bankrupt at the time of the deceased’s death. This is also the case if they became bankrupt before the estate administration is finalised.

Should the amount passed to the trustee in bankruptcy exceed the amount owed to creditors, then the remaining sum is paid to the beneficiary by the trustee in bankruptcy.

Liability when a beneficiary is bankrupt

A bankrupt beneficiary has a duty to declare their inheritance to the trustee in bankruptcy. Failure to do this is an offence.

It is the executors or administrators duty to ensure that money from the estate is paid to the correct person.

If inheritance is paid to a bankrupt beneficiary and the trustee in bankruptcy is not able to recover the full sum, they may claim against the executors or administrators. As a result they could be held personally liable for repaying the money as well as the trustee in bankruptcy’s legal costs in recovering it.

Avoiding liability

To avoid liability for paying a bankrupt beneficiary, a bankruptcy search is carried out before payment is made.

Dealing with an estate after a death can be complex. Probate solicitors can be engaged to represent executors and administrators. Thus ensuring that the paperwork, such as HM Revenue & Customs forms, probate applications and estate accounts are correct. Bankruptcy searches are carried out to ensure that beneficiaries are entitled to receive the sums paid to them.

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