Monday, November 22, 2010

Can a person in bankruptcy inherit from an estate?

Here at Scotia Trust, one of our main tasks is to administer the estates of deceased persons who named us as their executor. As you can imagine with all of the estates that cross our desks, we see pretty much every situation sooner or later. Right now my colleagues are working on an estate in which one of the beneficiaries has declared bankruptcy, and has not yet been discharged.

A discharge of bankruptcy is an order of the court that says that the bankrupt person has fulfilled his or her obligations under the bankruptcy proceedings. Either all debts have been paid, or more likely, the property that was available for paying debts was divided up among creditors so that they were paid in part. While a person is undergoing the process and the court has not yet discharged him or her, any surplus income not needed for essentials is paid to the trustee in bankruptcy to be divided among the creditors.

If the person who is in bankruptcy is the beneficiary of an estate of someone who passed away, the bankrupt person's entire share of the estate will go to the trustee in bankruptcy. The trustee will use as much of the inheritance as is needed to pay all of the debts, even if this means the whole inheritance. If the trustee doesn't need all of the inheritance to pay the debts, then the surplus amount will be paid to the bankrupt person.

The bankrupt person can't legally waive his inheritance (i.e. decide he doesn't want it), and he can't assign it to someone else (i.e. say that he wants his inheritance paid to his wife or children or friends etc). The trustee in bankruptcy has complete control over the bankrupt person's incoming money. The executor of the estate has no choice but to send the inheritance cheque to the trustee in bankruptcy.

If the bankrupt person has been discharged by the court and later inherits money, he is free to receive it just like anyone else.

34 comments:

  1. Bankruptcy can have disturbing effects on personal and professional life for longer duration. It affects your credit rating and borrowing capacity in near future. Hence, declaring bankruptcy should be considered as last resort.

    ReplyDelete
  2. Jazzie, I agree. I bet that even those who do consider the pros and cons of declaring bankruptcy don't think of what would happen in the event someone left them an inheritance.

    Lynne

    ReplyDelete
  3. If my trustee has closed my file , and I receive an inheritence, then what?

    ReplyDelete
  4. If by "closed my file" you mean that you've been discharged from bankruptcy, then you can receive your inheritance just as if you'd never been bankrupt. None of your inheritance will have to go to the trustee or the creditors.

    Lynne

    ReplyDelete
  5. If you are bankrupt and are beneficiary, can you hold off on cashing the cheque until bankruptcy is over if its only a few months from discharge?

    ReplyDelete
  6. I inherited 29000 when my mother passed away in 2011 I was in bankruptcy and as soon as I got the cheque I made sure it went to pay the creditors the 22,000 I owed them. I am now discharged from bankruptcy and recieved a letter the other day stating my creditors have been paid and also that my trustee was taking the remainder of the inheritance to pay for his fees is he allowed to do that or is he screwing with me because I was in bankruptcy

    ReplyDelete
    Replies
    1. Hi Paul,
      Yes a trustee is allowed to take fees from the funds, but I hope he has at least given you a written accounting of why his fees are $7,000.

      Lynne

      Delete
  7. As an executor to an estate I have a sibling that has advised me he is in bankruptcy and provided the name of the trustee for his bankruptcy. The trustee has advised me verbally of my requirement to forward my siblings portion to him which will be used to pay the creditors and then any remaining portion will be available to be paid to my sibling. When I asked the trustee to provide legal documents to support the request he advised that I did not need any and it is acceptable to proceed on his verbal request as my sibling would have to forward the cheques to him anyway if I was to pay it to him. Is that correct? I do not feel comfortable paying it out without a written request supported by legal documents.
    Thanks
    D

    ReplyDelete
    Replies
    1. Hi D,
      Executors should always try to "paper" their files to show why they paid out money or where money came from. The trustee should send you a letter confirming he is the trustee in bankruptcy and that funds owing to the bankrupt should be paid to him. I don't know if additional paperwork would really be adding much, but that's your call.

      Lynne

      Delete
  8. Thank you for sharing this information. I've been trying to find information on bankruptcies in Canada, so this is great to know.

    ReplyDelete
  9. I'm an executor for a family member who died 2 months ago. One of the beneficiaries just discharged her bankruptcy this week. Probate isn't done yet and money won't likely be paid out for a few months yet. Is this beneficiary entitled to her share at that time? Thanks for you help.

    ReplyDelete
    Replies
    1. Great question! The beneficiary was in bankruptcy at the time of the testator's death, and it's my understanding that such inheritances must be reported to the bankruptcy trustee. This is to prevent executors from stalling on paying out the inheritance to avoid the bankruptcy. Since the beneficiary has been discharged, it seems unlikely that the trustee will want to receive the inheritance. If the beneficiary doesn't want to report the inheritance, please remember that you may be personally liable for paying out money improperly. Be on the safe side and report it if the beneficiary does not.

      Lynne

      Delete
  10. Hi Lynne,
    Thanks for all this great information. I have a further one: As a trustee/executor of an estate is it possible to keep all the funds in a trust rather than dispersing them to the beneficiaries who are in bankruptcy? Or would you be forced to disperse them in a certain timeframe?
    Also, is it correct that if the trustee lives abroad, execution of the will must follow the laws of the country of residence of the trustee?
    thank you!

    ReplyDelete
    Replies
    1. If the beneficiary was in bankruptcy at the time the testator died, your duty as executor is to pay the beneficiary's entire share to the bankruptcy trustee. They can use as much of the inheritance as is needed to pay off the bankruptcy. Any funds that are not used up will be paid by the bankruptcy trustee to the beneficiary. Not complying with these rules would be fraudulent on your part, and seriously, who needs that?

      Yes, the general rule of trusts is that the trust lives where the trustee lives. There could be exceptions. Take your paperwork to a local lawyer if you need more detail.

      Lynne

      Delete
  11. Can a person who is in bankruptcy still act as the Executor of an estate?

    ReplyDelete
  12. What if the spouse of someone in bankruptcy inherits? And does it make any difference if that spouse has been discharged from bankruptcy?

    ReplyDelete
  13. What if the spouse of someone in bankruptcy inherits? And what if that spouse has been discharged from bankruptcy?

    ReplyDelete
    Replies
    1. A person who had been discharged from bankruptcy at the time the deceased died will be treated as anyone else would be. If a spouse inherits, it has nothing to do with the person who is in bankruptcy. They are two people, after all.

      Lynne

      Delete
  14. Awesomely useful blog...thanks in advance!

    Strange question, strange scenario.

    Parent (non bankrupt) will be leaving an inheritance
    Child (about to file for bankruptcy with discharge certainly years away)

    Is there a legal way for the parent to have a will drafted so as to set terms on the payment of the inheritance?

    So, could the parent say in the will, that s/he wants the inheritance to go to the child only after the bankruptcy has been discharged? Could that statement in the will be binding & could it protect the bankrupt (undischarged) child?

    A convoluted situation... but it's hard to know who to consult about this ind of thing.

    ReplyDelete
  15. So if your in Bankruptsy and two mo's from discharged and just been told that your a beneficiary, but have not yet told the trustee,because technically I have not received any surplus income. What will happen if the person is discharger and then receive the money...?
    I guess my question is at what point do I need to tell the trustee is it when I have the money or when I am sent notification that I am to receive money in the future?

    ReplyDelete
    Replies
    1. The key point of timing is whether you were still in bankruptcy at the time the person died and left you money, not when you receive the money. Believe me, you are not the first person who thought they could beat the system on a technicality, nor will you be the first to find out you can't.

      Lynne

      Delete
  16. Hello.

    What happens if you receive an inheritance during the time you are declared an "Undischarged Bankrupt"?

    If you choose not to declare bankruptcy, what can creditors do if you receive an inheritance within two years of last credit activity? What can they do after two years?

    Thank you.

    ReplyDelete
  17. --- Please revise last post. ---

    Sorry, should have been more specific as per the first question.

    What happens if the courts REFUSE your discharge INDEFINITELY. What happens if you receive an inheritance anytime in the future?

    Second question as stated.

    Thanks!

    ReplyDelete
  18. Many thanks for all the useful information in this post. I’m in the midst of trying to figure out how to resolve a somewhat related issue with an estate to which I’m the executor and am hoping someone could assist with a question. It's a little complicated, so please bear with me.

    My father recently passed away. His will instructs that his assets (net of taxes, debts, funeral costs, etc…) be divided equally among his surviving kids (my siblings and I). He also named each of us as beneficiaries of his RRSPs and a small insurance policy, which collectively amount to the vast majority of his estate’s assets. Sounds straight forward but here’s the problem: I’ve discovered that the RRSP and insurance proceeds will bypass the estate (and the corresponding taxes, debts and funeral costs within the estate) AND that one of my siblings has a large undischarged bankruptcy. From what I’ve been able to discern so far, this means that my sibling’s portion of the gross assets (before taxes, debts, and funeral costs) is required to be sent directly to the trustee of her bankruptcy, regardless of whether this amount is much greater than what she was intended to receive (because it is before her share of RRSP taxes, estate debts, and funeral costs have been applied). This would ultimately greatly reduce the share of her siblings’ net assets.

    Can someone tell me whether I am correct in my interpretation and, if so, is there any way around this? For instance, could her portion of the assets be paid back into the estate to contribute to the settling of taxes, debts and funeral costs and then her share of the NET assets be sent to the trustees?

    ReplyDelete
    Replies
    1. I believe that your interpretation is correct. The RRSP and insurance policy should pay directly from the bank and insurance company without passing through the executor's hands. It is always the case that the estate pays the taxes on an RRSP even when the estate did not receive it. However, I don't see how this will "greatly reduce" her siblings' shares if the RRSP is divided equally among them. They will each receive the same amount. Nobody's share goes through the estate. Taxes and expenses will be paid from the rest of the estate, to the extent that the estate has funds. If nothing is left, nobody gets anything so everyone is still equal. If there are taxes left unpaid, Canada Revenue Agency may (and likely will) pursue the beneficiaries, including the one in bankruptcy, for the unpaid taxes.

      Lynne

      Delete
    2. Thanks for your reply Lynne! To better illustrate the impact of the two scenarios I described and the issue I believe I’m facing, here’s an example. Let’s assume all assets in the estate are either RRSPs or life insurance proceeds, they total $100,000, and all assets are equally directed to 3 beneficiary kids. Let’s also assume that estate costs (taxes, debts, funeral costs) total $50,000. If assets bypass the estate (because they are RRSPs and life insurance proceeds with designated beneficiaries), each child will directly receive $33,333, however for one of the kids their $33,333 share will go directly to their bankruptcy trustee – leaving the two other kids with a combined $66,666 to cover the $50,000 in estate costs. After estate costs, there will only be $16,666 remaining (or $8,333 each divided by the remaining 2 kids). Whereas, if the assets had assigned directly to the estate (i.e. the estate was designated the beneficiary or if the assets were none RRSPs and insurance which don’t have beneficiaries), there would have been $50,000 remaining ($100,000 in assets minus $50,000 in costs) to be divided amongst the 3 kids (so $16,666 each) and the bankruptcy trustee would only have received $16,666 from the bankrupt child (versus $33,333). Does that make sense and do you know of any way around this?

      Delete
  19. I applied for bankruptcy Sept 2011 - told it would take 2 yrs potentially for a discharge -- it went to court on Oct. 15th 2013 and was set as a "Conditional Discharge" Even tho I had sent all the "Budget Reports" each month, the trustee said they didn't receive 4 of them. ( The trustee's office never returned my calls or respond to my emails or it seemed even checked them for my change of addresses. etc. )The Trustee's office finally told me in Nov. 2013 when I connected with them as to the outcome of the court date - that I required these months Budgets and that they had sent me the document to a previous address = so she emailed a copy. I immediately complied with what I was told I required and she said it would take about a week or so to look them over.I followed up with an email as to the status ( 2 wks later ) and no response. Finally getting a hold of them today, and they told me they couldn't open the bank statement for 2 of the months. Now I am told it could take a few more weeks -- In the mean time end of Nov. ) I have been notified by my deceased uncle's lawyer that I would be receiving an inheritance. With all the delays and unprofessionalism brought about by the trustee's office, will they still be entitled to take the inheritance, even though every thing should / would have been completed prior to me even being notified of receiving anything if they had done what they were suppose to.

    ReplyDelete
  20. Hi,

    My father declared bankruptcy in December 2011 and was discharged September 15, 2012. His brother died in August, 2012 and he was named a beneficiary. Is the money my father inherited credited to the trustees because he was discharged one month after his brother died? As well, he wasn't notified of what he inherited until December 2013.

    ReplyDelete
  21. If your last living parent dies say in January and the estate is already in the lawyers hands with probate etc., and one of the beneficiaries files for bankruptcy in February will that beneficiary get there money or will it go to the trustee in bankruptcy

    ReplyDelete
  22. Hello Lynne,

    Could you explain whether there would be any repercussions if someone was going through bankruptcy and is an executor or trustee of an estate?

    ReplyDelete
  23. Howard Landau has over 20 years of debt solution experience and will give you the right answers to
    your questions. Howard has helped thousands of debtors in his career and will gladly meet you
    anywhere within or near the GTA to help you.

    ReplyDelete
  24. How does an executor know that an heir is an un-discharged bankrupt? What if he didn't and gave the proceeds ($85k) to the bankrupt who now refuses to hand it over to his trustee?

    ReplyDelete
  25. Hello Lynne,

    My friend is mid to late term bankruptcy and owes 1 creditor, Revenue Canada, about $100,000. He has received $300,00 from an inheritance and it is in the trustees account. The trustee states he will not release the excess money until the proposal has been accepted.
    Is this correct, and if so, will there be interest payable on the excess money in the trustees account to my friend?
    Thanks a bunch!

    ReplyDelete

You might also like

Related Posts with Thumbnails