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Bankrupt Beneficiary – Who gets the money?

When an individual becomes bankrupt, subject to any contrary provision of the Bankruptcy Act, 1966, the assets of the bankrupt vest in the trustee in bankruptcy.  Those assets are then used to pay the debts of the bankrupt  

It follows that if a beneficiary of a Will is bankrupt when the testator dies, then the executor us bound to pay the entitlement of the beneficiary to the trustee in bankruptcy. The inheritance is an asset of the bankrupt. If the executor fails to do so and pays the entitlement to the beneficiary (being the bankrupt) and if the trustee in bankruptcy becomes aware of the entitlement, then the trustee in bankruptcy will request the executor to pay the entitlement to the trustee. If the bankrupt refuses to repay the entitlement to the executor then the executor is personally liable to make the payment to the trustee. It is therefore very important that an executor ensures that a beneficiary is not bankrupt (or likely to become bankrupt in the foreseeable future) before distributing the estate.

If a person when making his or her Will suspects that one of the beneficiaries is bankrupt (or may become bankrupt), the Will maker should inform the solicitor making the Will, and receive advice as to the options available if the Will maker does not want part of the estate to be paid to the trustee in bankruptcy in the event that the beneficiary is bankrupt at the time of death.  Further, if after a person makes his or her Will, he or she becomes aware that one of the beneficiaries is bankrupt and if the Will maker does not want part of his or her estate to go to the trustee in bankruptcy, then the Will should be changed to remove the bankrupt as a beneficiary.  It is important to act promptly.

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