Protecting Inherited Personal Assets In the event of Bankruptcy

06/05/2013 by Michael Jones

Protecting Inherited  Personal Assets In the event of Bankruptcy

One issue that frequently arises in relation to the administration of bankrupt estates is the difficulty of the bankrupt being a beneficiary under a Will.

Divisible property is defined broadly in the Bankruptcy Act and it includes, not only property owned by the bankrupt at the time of the bankruptcy, but also property acquired by the bankrupt after bankruptcy up until the time of the discharge, which is usually three years.  This is referred to as “after acquired property”.

The most common form of after acquired property is inheritance.  Simply put, if a bankrupt inherits money or property from a parent or some other person, that property forms part of the assets available to the trustee for distribution to creditors.  Of course, if the benefactor changes the Will and dis-inherits the individual, the problem is avoided, but on its own, this can have many practical problems quite apart from the enormous relationship issues that might be created amongst siblings.  In addition it is not uncommon for bankrupts to remain circumspect about their financial affairs when it comes to relatives particularly parents, and consequently, parents may be totally unaware of their children’s dire financial circumstances.

A useful solution to this problem would be to have a standard clause in every Will which specifically refers to a bankruptcy event and creates a testamentary trust in the event of the bankruptcy of any beneficiary.  Such a standard clause would avoid the necessity to revisit the Will in the event of a bankruptcy and the complications that may arise in these circumstances.