Probate fee/ Deed of variation - BANKRUPTCY discussion

[PinkDalek]

"... indeed I might be under a legal duty to pay X from my inheritance (e.g. if I were an undischarged bankrupt and X was one of my creditors"

In that situation I believe it would be down to you to inform the Official Receiver of the inheritance which, I think, they'll collect from the Executors. More here which should clarify http://researchbriefings.files.parliame ... P-7321.pdf

Moderator Message:
At request of Mod Mel, I have split the topic where the bankruptcy related discussions start. The were OT for the original thread but useful discussion. Clariman

[Lootman]

I might be under a legal duty to pay X from my inheritance (e.g. if I were an undischarged bankrupt and X was one of my creditors).

I do not believe that you would be under a legal obligation to do that. At least there is no duty upon you as a beneficiary to do a POV to satisfy a personal creditor. You are perfectly entitled to receive your inheritance and wait for the creditor to seek payment.

Nor could an executor impose such a solution on you because this is not a debt of the estate but rather a personal debt of a beneficiary, which is nothing to do with the executor.

What I think you are not allowed to do is receive an inheritance in such a situation and then attempt to conceal that windfall from the creditor. Nor do a POV to renounce an inheritance and give it to a third party, that could otherwise have been used to satisfy a debt.

So you don't have to aggressively replay the debt via POV. You just have to not affirmatively try and avoid paying it.

[Lootman]

"... indeed I might be under a legal duty to pay X from my inheritance (e.g. if I were an undischarged bankrupt and X was one of my creditors"

In that situation I believe it would be down to you to inform the Official Receiver of the inheritance which, I think, they'll collect from the Executors. More here which should clarify http://researchbriefings.files.parliame ... P-7321.pdf

I find that reference confusing. The way I read it, it is the bankrupt and beneficiary who has the primary responsibility to inform the bankruptcy trustee that an inheritance has been received. And that surely makes the most sense because the rule applies to any windfall that the bankrupt might receive, such as a gift or winning the lottery, where there is no executor anyway. Otherwise the implication is that nobody could ever give a bankrupt any money.

I don't read that as requiring any special action by the executor who, as noted before, is concerned with debts owed by the estate and not by the beneficiaries. That said, if an executor receives notice from a trustee that the beneficiary is a bankrupt then the executor should surely seek advice before distributing that part of the estate, to avoid the risk of being held personally liable. The key section is here:

"In practice, the named executors of a will should undertake a bankruptcy search to check whether or not there are any bankruptcy orders in place, before distributions are made to the beneficiaries. If a beneficiary is indeed bankrupt, their inheritance (or part of it) may fall due to their trustee in bankruptcy.

In any event, under the IA 1986, the bankrupt has a responsibility at all times to be honest with their trustee about their situation. An undischarged bankrupt is obliged to tell the trustee about any inheritance or windfall they receive within 28 days. If the bankrupt fails to do so, the trustee has powers to reverse any transaction if it is seen to be a measure undertaken by the bankrupt to put assets outside of the reach of his/her creditors."

To my eye, the second paragraph places the responsibility for full disclosure squarely upon the bankrupt, which is surely how it should be. And whilst I feel sure the creditors would rather just grab the money from the estate than rely on the bankrupt to be honest, it seems to me that the fundamental legal obligation here exists between the bankrupt and the trustee.

[PinkDalek]

I find that reference confusing. ...

Yes, I only glanced at it, mentioned it in passing, and you may well be correct. However, I did understand the tenor of what Gengulphus was saying overall. Come what may, I don't think discussing bankruptcy any further on this thread is assisting Bouleversee, so I'll leave it there. A new Topic on the subject might be of interest.

[Gengulphus]

"... indeed I might be under a legal duty to pay X from my inheritance (e.g. if I were an undischarged bankrupt and X was one of my creditors"

In that situation I believe it would be down to you to inform the Official Receiver of the inheritance which, I think, they'll collect from the Executors. More here which should clarify http://researchbriefings.files.parliame ... P-7321.pdf

Sorry, yes, I think you're right - I should have known better than to comment on exactly what one should do in situations I'm not familiar with!

But my basic point remains, namely that in such circumstances, one is not merely under no legal duty to try to fulfil the deceased's wish that X should not benefit from the money they leave, but actually under a legal duty to take steps that make it more likely that that wish isn't fulfilled.

Gengulphus

[Lootman]

Sorry, yes, I think you're right - I should have known better than to comment on exactly what one should do in situations I'm not familiar with!

But my basic point remains, namely that in such circumstances, one is not merely under no legal duty to try to fulfil the deceased's wish that X should not benefit from the money they leave, but actually under a legal duty to take steps that make it more likely that that wish isn't fulfilled

Yes, I think that is the correct way to characterise the obligation, and the problem here.

If the deceased had really wanted to ensure that the beneficiary absolutely received the inheritance, and he knew about the pending bankruptcy, then he should have taken steps to organise his affairs in such a way that there is no risk that probate happens within the one year period that a bankruptcy is active. If it were a gift before that one year or a bequest, gift or transfer after that one year then, in both cases, the beneficiary can keep the money. So it's desperately unlucky if the bequest gets diverted just because he died in "the wrong year".

So perhaps the morale here is that if a beneficiary is undergoing bankruptcy then he should have a chat with the will maker to ensure that the money reaches him via another route, and one that does not fall foul of the bankruptcy rules. I'm not sure that a Will can be phrased in such a way that says "X gets 100K in cash unless he is an undischarged bankrupt at the time, in which case it goes to Y". But at the same time it is entirely reasonable that the will-maker does not want his money going to people he doesn't know and doesn't care about.

In fact I recall a topic on TMF where a parent wanted to leave all their estate to one child because the other child was undergoing bankruptcy and didn't want to "waste" their share. The preferred sibling could always make a gift later to the other sibling, if the wishes of the parent were to be honoured.

[Gengulphus]

If the deceased had really wanted to ensure that the beneficiary absolutely received the inheritance, and he knew about the pending bankruptcy, then he should have taken steps to organise his affairs in such a way that there is no risk that probate happens within the one year period that a bankruptcy is active. If it were a gift before that one year or a bequest, gift or transfer after that one year then, in both cases, the beneficiary can keep the money. So it's desperately unlucky if the bequest gets diverted just because he died in "the wrong year".

But the will has generally been written long before the pending bankruptcy, the beneficiary may not have been forthcoming about it, and even if they were, the deceased may well not have been mentally competent to change their will. I'll accept that it's unlucky if one of those things happens and causes the money to end up with the creditor - but 'desperately unlucky' is an exaggeration IMHO.

So perhaps the morale here is that if a beneficiary is undergoing bankruptcy then he should have a chat with the will maker to ensure that the money reaches him via another route, and one that does not fall foul of the bankruptcy rules. ...

Agreed - if possible. But it may not be possible, e.g. because the deceased had advanced Alzheimers by the time the beneficiary knew they were undergoing bankruptcy, or indeed because the beneficiary didn't know about being a beneficiary...

Gengulphus

[Lootman]

But the will has generally been written long before the pending bankruptcy, the beneficiary may not have been forthcoming about it, and even if they were, the deceased may well not have been mentally competent to change their will. I'll accept that it's unlucky if one of those things happens and causes the money to end up with the creditor - but 'desperately unlucky' is an exaggeration IMHO.

Well yes, I didn't define "desperately" there. But if you live for 80 years and the one year you get a life-changing inheritance just happens to be the one year you are under bankruptcy, then I suspect it would certainly feel very unlucky.

Point taken that the will maker may have lost competence to change a will by the time they discover that a beneficiary is bankrupt. I wonder if there can be standard phrasing within a will to exclude any beneficiary who is undergoing bankruptcy? With their bequest instead being shared between the other residual beneficiaries?

Because it seems that, after death, there is nothing that can be done legally to avoid the creditors being paid either out of the estate during probate, or by the beneficiary after probate. And I'm fairly sure it is the date of death that drives this and not the date that probate is granted, otherwise the process could simply be delayed until after the bankruptcy is discharged.

Moderator Message:
Hi - we seem to be straying from the original question with this move into bankruptcy and wills, please could this be discussed elsewhere so the OP can see the advice that relates to them? Many thanks - Mel

[Lootman]

Since we now have a topic set up specifically for this, I will ask again the question that remains unanswered from earlier.

Can a clause be added to a Will that prevents any undischarged bankrupt from receiving assets from an estate, even if that individual is named as a beneficiary in that Will?

Could instead the Will instruct that a trust be set up with that diverted money, with discretion given to those trustees to make decisions about its disposition at a later time, say, after the bankruptcy is discharged?

And if not, is the best course for a parent worried about this, and knowing that one of the beneficiaries in their Will has debt issues and may need bankruptcy, to write that person out of the Will and directly fund a trust to handle those monies?

[supremetwo]

Since we now have a topic set up specifically for this, I will ask again the question that remains unanswered from earlier.

Can a clause be added to a Will that prevents any undischarged bankrupt from receiving assets from an estate, even if that individual is named as a beneficiary in that Will?

Could instead the Will instruct that a trust be set up with that diverted money, with discretion given to those trustees to make decisions about its disposition at a later time, say, after the bankruptcy is discharged?

And if not, is the best course for a parent worried about this, and knowing that one of the beneficiaries in their Will has debt issues and may need bankruptcy, to write that person out of the Will and directly fund a trust to handle those monies?

I cannot see how any Will clause will remove this risk:-
http://www.lawsociety.org.uk/support-se ... ficiaries/
In such cases, if the bankrupt puts the assets beyond the reach of the trustee in bankruptcy, there is a real risk that the trustee in bankruptcy, on behalf of the bankrupt's creditors, will claim compensation against the personal representatives.

Will 'directly fund a trust to handle those monies' also be an asset of a potential bankrupt?

[Lootman]

I cannot see how any Will clause will remove this risk:-
http://www.lawsociety.org.uk/support-se ... ficiaries/
In such cases, if the bankrupt puts the assets beyond the reach of the trustee in bankruptcy, there is a real risk that the trustee in bankruptcy, on behalf of the bankrupt's creditors, will claim compensation against the personal representatives.

Will 'directly fund a trust to handle those monies' also be an asset of a potential bankrupt?

But in my example, it wasn't the "the bankrupt putting the assets beyond the reach of the trustee in bankruptcy". Nor would it be the personal representatives doing that. Rather, it was the deceased who wrote his Will in such a way that no undischarged bankrupt can benefit from that Will. The personal representatives simply followed the Will's instructions.

I noted earlier that there probably is nothing that can legally be done, after death, to prevent a bequest to a bankrupt being diverted to his creditors. The idea here is to avoid that situation arising by writing a Will in such a way that a beneficiary's entitlement is extinguished by virtue of that bankrupt status (*)

If the bankrupt's trustee, on behalf of the creditors, wishes to challenge that, then would they not have to challenge the legal validity and effectiveness of the specific clause in the Will that disallows any bankrupt from being a beneficiary?

If you are correct then the only option for the Will maker is to explicitly write that beneficiary out of the Will, and to take that bequest and gift it to a trust or trusted individual. But both require prior knowledge of an impending bankruptcy. The idea of the general Will clause I cited is to ensure the same result without prior knowledge of who is under bankruptcy or when.

(*) I've definitely seen conditional clauses in Wills, where a distribution is cited to depend upon age, being married, having children etc.

[Clitheroekid]

The idea here is to avoid that situation arising by writing a Will in such a way that a beneficiary's entitlement is extinguished by virtue of that bankrupt status

Under English law an attempt to impose a condition on a legacy that it would be forfeited if the beneficiary were to become bankrupt would not be valid, and the beneficiary (or in practice his creditors) would receive the gift anyway.

The usual solution would be to leave a legacy to the executors / trustees of the Will on a discretionary trust, so that they could decide whether or not to pay the beneficiary. If he wasn't bankrupt they could pay him; if he was they wouldn't.

The point is that because they have discretion as to whether or not he receives anything the creditors can't force them to pay him, and are therefore powerless.

[Lootman]

The idea here is to avoid that situation arising by writing a Will in such a way that a beneficiary's entitlement is extinguished by virtue of that bankrupt status

Under English law an attempt to impose a condition on a legacy that it would be forfeited if the beneficiary were to become bankrupt would not be valid, and the beneficiary (or in practice his creditors) would receive the gift anyway.

OK, that's annoying.

The usual solution would be to leave a legacy to the executors / trustees of the Will on a discretionary trust, so that they could decide whether or not to pay the beneficiary. If he wasn't bankrupt they could pay him; if he was they wouldn't.

The point is that because they have discretion as to whether or not he receives anything the creditors can't force them to pay him, and are therefore powerless.

That sounds reasonable. So as someone who is anxious to avoid any of my estate going to a creditor of a bankrupt beneficiary, my Will should specify that all legacies be routed through a discretionary trust.

If I have actual knowledge that one of my beneficiaries is going through bankruptcy, then I could explicitly remove them from my Will, and explicitly set up a Trust for his/her share. But your solution has the advantage of not requiring me to know of the bankruptcy, nor necessitating any changes to my Will.

So is there a reason why all Wills aren't written this way? It completely removes "bankruptcy risk".