KP Carmody & Co

Assets inherited by a bankrupt are not protected from bankruptcy. The courts have confirmed that by virtue of s58 of the Bankruptcy Act (“the Act”), a bankrupt’s interest in a deceased estate is an interest that vests in the trustee in bankruptcy as after acquired property.

A bankrupt beneficiary named in the will of a deceased may disclaim their interest under the will before the will is administered. This will ensure that the trustee in bankruptcy cannot claim the bankrupt beneficiary’s interest in the will as after acquired property to be available for distribution among creditors of the bankrupt beneficiary.

Sometimes inheritances in a will are channeled through what is known as a testamentary trust. This is usually akin to a discretionary trust save that the trust is set up in the will of the deceased benefactor. A beneficiary of a testamentary trust usually has a mere expectancy rather than an interest in the assets and income of the trust. The trustee of the testamentary trust has a discretion to whom they will distribute assets and/or income of the trust. In these circumstances it is generally considered that a trustee in bankruptcy cannot claim the assets of the testamentary trust as after acquired property and available for distribution to the creditors of the bankrupt.

There has been in recent years a debate as to whether the trustee in bankruptcy was entitled to seize the assets of a bankrupt beneficiary of an estate where that beneficiary was claimed to control the trustee of the testamentary trust. The control of a discretionary trust may be via a power of the beneficiary to remove or appoint trustees. It appears that except where the trust is a sham a trustee in bankruptcy will not be entitled to claim the assets of a testamentary trust even if the bankrupt beneficiary is entitled to appoint or remove trustees of the testamentary trust.

The advice in this article is general in nature and you should consult your solicitor for specific advice.