What happens if a beneficiary is bankrupt?

If you are dealing with the estate of someone who has died, you need to check whether any of the beneficiaries have been declared bankrupt. If you mistakenly distribute part of the estate to a bankrupt beneficiary, the trustee in bankruptcy could bring a claim against you to recover any money that they were not able to retrieve from the beneficiary.

As the executor or administrator of an estate, you have a duty to distribute the net estate to the right beneficiaries. Where someone has been declared bankrupt, their trustee in bankruptcy will take over their financial affairs. Any income gained by the bankrupt individual during that period should be paid to the trustee.

The trustee will provide the bankrupt individual with living expenses and the remaining funds will be distributed to the creditors in order of preference.

When should an inheritance be paid to a trustee in bankruptcy?

If the individual in question was an undischarged bankrupt at the time of the deceased’s death or made bankrupt before the estate administration was finalised, the estate’s executor or administrator should pay their legacy directly to the trustee in bankruptcy.

If the amount passed to the trustee in bankruptcy exceeds the amount owed to creditors, then the remaining sum will be paid to the beneficiary by the trustee in bankruptcy.

Liability when a beneficiary is bankrupt

A bankrupt beneficiary is under a duty to declare their inheritance to the trustee in bankruptcy. Failure to do this is an offence.

The executors or administrators also have a duty to ensure that money from the estate is paid to the correct person.

If the executors or administrators were to pay the inheritance to a bankrupt beneficiary and the trustee in bankruptcy was not able to recover the full sum, they could make a claim against the executors or administrators, who could be held personally liable for repaying the money as well as the trustee in bankruptcy’s legal costs in recovering it.

Avoiding liability

To avoid liability for paying it to a bankrupt beneficiary, a bankruptcy search should be carried out before payment is made.

Dealing with an estate after a death can be complex. Our probate solicitors represent executors and administrators, ensuring that the paperwork, such as HM Revenue & Customs forms, probate applications and estate accounts are correct. We also always carry out bankruptcy searches to make sure that beneficiaries are entitled to receive the sums paid to them.

Contact us

If you would like to speak to one of our experts, ring us on 0800 781 6658 or email us at enquiries@estplan.co.uk.