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Monday, April 11, 2022

Bankrupt beneficiary loses attempt to keep $1.1 million payable from a trust

Executors and beneficiaries alike have questions about how estates and bankrupt beneficiaries go together. Executors want to know what they are legally required to do with a share of an estate that is payable to a person in bankruptcy. And of course the beneficiaries want to know whether they are going to inherit the share or lose it to the bankruptcy process.

This question was recently looked at by the Ontario Court of Appeal in the case of Re: Richards. In this case, Michael Richards was the beneficiary of a trust. The asset in the trust was a home and the terms of the trust said that Mr. Richards' parents could live there for the rest of their lives, after which the asset would be transferred to him. The parents passed away, after which the trustee sold the property for $1,172,120.90. 

As it turns out, Mr. Richards was at that time in bankruptcy. He owed the bank $987,613. They got an order from a bankruptcy judge saying they could take this from Mr. Richards' account, plus costs and interest.

Mr. Richards appealed to a higher court. He said that his interest in the trust was suspended while he was in bankruptcy. He wanted to be discharged from bankruptcy first (still owing the $987,613) and then after that, he would inherit the trust property. This obviously clueless defense simply didn't wash with the appeal court.

The appeal court upheld the bankruptcy order. In the end, all Mr. Richard did was rack up more legal fees as he tried to avoid paying his legal debts.

The law is clear that when you are an undischarged bankrupt, money that you inherit - up to the amount that you owe - is to be paid to the bankruptcy trustee. This can be a tough one for families, since executors often want to help out a sibling who is having financial trouble. I have been asked many times by executors if they can simply hold onto the beneficiary's share until the bankruptcy proceeding is over. A key to knowing this is a bad idea is that the executor usually follows the initial question with "how is anyone going to know?"

Anyone who would like to read the Richards case may do so here.

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