The intersection of bankruptcy and deceased estates can create complex legal issues for executors and beneficiaries. In the administration of deceased estates, the financial status of executors and beneficiaries can have legal consequences. If an executor or beneficiary is bankrupt, complications may arise. Bankruptcy, whether it occurs before or after the grant of probate, introduces legal complexities. Entitlements and responsibilities may be altered as a result.
This article outlines the key implications of bankruptcy and deceased estates within the estate context in New South Wales.
Bankruptcy and Deceased Estates: Can a Bankrupt Act as Executor?
A person who is bankrupt cannot act as an executor or administrator of a deceased estate in New South Wales.
Under section 59 of the Probate and Administration Act 1898 (NSW), the Supreme Court may grant administration to a suitable person. A person who is bankrupt is disqualified from acting as an executor or administrator. This is due to the fiduciary duties involved and the potential for conflict with creditors.
- If a person is bankrupt before a grant of probate or administration is made, the Court will not issue a grant in their favour. An alternate executor or administrator must be appointed, either from those named in the will, or through an application for Letters of Administration with the Will annexed (if applicable).
- If a person becomes bankrupt after the grant, they are not automatically removed from office. However, practical and legal difficulties often arise, including potential applications to the Court to revoke the grant or appoint a replacement administrator (e.g., a co-executor or the NSW Trustee and Guardian), particularly if the bankrupt is unable to fulfil their fiduciary obligations.
It is therefore prudent for will-makers and advisors to consider including substitute executors in wills to mitigate such risks.
Bankruptcy and Deceased Estates: Can a Bankrupt Receive an Inheritance?
When a beneficiary of an estate is bankrupt, the right to receive an inheritance may be affected, depending on the timing of the bankruptcy and the stage of the estate administration.
Under section 116(1)(a) of the Bankruptcy Act 1966 (Cth), a bankrupt’s property vests in their trustee in bankruptcy. This includes after-acquired property within a certain period of time, specifically, property acquired during the period of bankruptcy.
Inheritance Received During Bankruptcy
- If a beneficiary is bankrupt before the date of death, the inheritance forms part of the bankrupt estate and vests in the trustee in bankruptcy.
- If the bankruptcy arises after the date of death but before distribution, the entitlement is still considered after-acquired property and vests in the trustee.
In either scenario, the beneficiary does not receive the inheritance personally. Instead, it is used by the trustee in bankruptcy to satisfy creditor claims. Only if there is a surplus after the conclusion of the bankruptcy would any remainder be returned to the beneficiary.
Timing of Distribution
The timing of distribution is crucial in determining the effect of bankruptcy on an inheritance. The relevant date is not the distribution date but the date the interest in the estate vests. In most cases, this is the date of death. For discretionary or contingent entitlements, the vesting date may differ. Legal advice should be obtained in such cases.
Bankruptcy and Deceased Estates: Practical Considerations for Executors and Practitioners
- Executors must take care when administering estates involving bankrupt beneficiaries. They may be required to liaise with the trustee in bankruptcy and should avoid making distributions directly to a bankrupt individual.
- Beneficiaries contemplating bankruptcy or who are currently bankrupt should be advised of the implications for any inheritance they may receive.
- Will-makers may consider using testamentary discretionary trusts to provide some level of asset protection in anticipation of potential bankruptcy or other financial risks for beneficiaries.
Conclusion
Bankruptcy has significant ramifications for both the administration and distribution of deceased estates. Executors who are bankrupt are generally disqualified from acting. Beneficiaries who are bankrupt will typically forfeit their inheritance to their trustee in bankruptcy. Careful estate planning and informed legal advice are critical to safeguarding the intentions of the deceased. This also ensures the interests of all parties involved are protected.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
