Many people think of writing a Will as a kind of last word on how they would like their money and belongings to be dealt with after their death. Though this is a reasonably good way of describing what a Will is intended to be, it’s important to understand that this kind of legal document is not always the last word.

There are a number of reasons why an individual’s wishes might not be able to be carried out exactly as they requested.

The most common of these is because the Will in question is no longer valid. There are all sorts of ways that an individual can accidentally invalidate their Will. You can read about this in greater detail in our free ebook Challenging a Will.

However, even a valid Will may not be able to be carried out exactly as intended. There are various issues that can complicate this and may mean that some of the beneficiaries of a Will are unable to receive what has been left to them. One of these complicating issues is bankruptcy.

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Why does bankruptcy affect your position as a beneficiary?

When a person is declared bankrupt, a trustee is appointed by the bankruptcy courts on their behalf. The role of the trustee is to take charge of the bankrupt person’s finances during the period of the bankruptcy order.

They do this in two ways:

  1. By providing the bankrupt person with an allowance for living costs
  2. By distributing any remaining income amongst the bankrupt person’s creditors

A bankrupt person is required by law to disclose details of any income during this time to the trustee. That income would then need to go directly to the trustee for them to manage as per the bankruptcy order.

If a person who had been declared bankrupt was due to receive an inheritance while the bankruptcy order was in place, the inheritance would need to go straight to the trustee.

It’s important to note that bankruptcy would only affect a beneficiary’s ability to inherit if they were under a bankruptcy order when the testator (a person who has written a Will) dies, or if they were declared bankrupt in the period between the testator dying and their estate being finalised.

If a person became a beneficiary after they had been discharged from bankruptcy their ability to inherit would not be affected.

What about in cases where there wasn’t a Will?

If a bankrupt person was due to receive an inheritance on the basis of intestacy rules (in cases where the person who has died has not left a valid Will), all the same issues would arise.

What if estate payments aren’t made until after the bankruptcy order has been discharged?

Bankruptcy orders usually stay in place for a period of one year, though they can last for longer. The process of administering an estate and having probate granted can take anything from a few months to a few years.

It would be perfectly possible for a testator to die before or during the period where their beneficiary has been declared bankrupt but for the beneficiary to have been discharged from bankruptcy before probate is granted and any payments are ready to be made.

However, this doesn’t mean that the beneficiary would therefore be able to receive their inheritance.

Re Bertha Hemming Deceased, Raymond Saul & Co. v Holden[2008] EWHC 2731 (Ch)

In 2008 there was a landmark case concerning the estate of Bertha Hemming, who’s Will left the residuary of her estate to her son, Bernard Hemming. Soon after Ms Hemming died, Mr Hemming was declared bankrupt. However, Ms Hemming’s estate was not fully administered until the summer of 2005, a few months after Mr Hemming had been discharged from bankruptcy.

What followed was a lengthy legal battle in which the solicitors dealing with Ms Hemming’s estate argued with Mr Hemming’s former bankruptcy trustee about who was entitled to receive the sum of money that made up the residuary of the estate. Sadly, Mr Hemming also died during these proceedings.

The final decision on this case related to what a residuary beneficiary actually gains the right to when they are named in a Will.

It was decided that as a residual beneficiary, Mr Hemming was entitled to two things:

  1. The right to have the estate administered
  2. The right to have any relevant assets paid to him at the conclusion of the administration of the estate

As Mr Hemming held these rights when he was declared bankrupt, these rights were then transferred to his trustee, as per the bankruptcy order. Therefore, the trustee then held the right to receive the residuary funds when the estate administration was concluded, regardless of whether this was to occur before or after Mr Hemming was discharged from bankruptcy.

What would happen to the inheritance?

In cases where an inheritance passes to a trustee in place of a bankrupt beneficiary, the trustee would then distribute that inheritance among the beneficiary’s creditors. If the inheritance was made up of property or chattel, the trustee would usually sell these in order to raise funds for the creditors.

If any of the inheritance remained after the creditors had all been paid off, the trustee would then be able to release this back to the beneficiary.

What happens if these rules are not followed?

If a person who has been declared bankrupt didn’t notify their trustee of any inheritance they were due, this would be an offence and could result in a fine or even imprisonment. It would also be an offence for them not to tell the administrators or person representatives dealing with the estate that they were under a bankruptcy order.

Executors and personal representatives would also find themselves in trouble if they were to release an inheritance to a beneficiary who was under a bankruptcy order, even if they were unaware of this. In these cases, the trustee of the bankrupt beneficiary would be able to sue the executor or personal representative for the sum released.

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