Q:My brother, after many years building his business was just starting to make money worthy of the sacrifice. And then this COVID19 thing started, he sees no option to bankruptcy. He’s a would thus be a bankrupt beneficiary of my parents’ estate. My parents worry that when they die, their gift to my brother in their wills would go to satisfy his creditors. Could we prevent my parents’ fear from coming to pass? Also, my brother is like you, me or anyone else, stable, but I remember Derrick Bird.
A: On the first Wednesday of June 2010, shortly after David Cameron’s ascension to the office of the Queen’s Chief Minister, at his first Prime Minister’s Questions he was compelled to comment on the events of that day that caused the first closure of the Sellafield nuclear reprocessing plant, the events that caused the cancellation episode of the TV show Coronation Street which had taken four weeks to film.
Bankrupt Beneficiary on the Rampage
Late on that Wednesday morn, a middle-aged Cumbria man, Derrick Bird, in discharging 47 rounds of ammunition, killed a dozen people and further injured eleven. The killer’s two first victims were his twin brother David and a local solicitor, Kevin Commons. Mr Commons had worked on the gunman’s father’s will. Till this day from then, the killer’s motives have been unknown as he turned his gun on himself. Thus, the rumours of his reasons came out like soldiers on parade.
We align the two first victims and the fact of the murderer had been subject to an HMRC tax investigation with Derrick’s apprehension of bankruptcy. A potential bankrupt is reasonable in his anxiety that his inheritance would be used to satisfy his creditors in bankruptcy. The laws treat bankrupt beneficiaries harshly.
We’re not privy to the Bird family’s wills, but we can address your parents’ anxiety that the fruit of their lives’ work rather than secure a good standard of living for generations of their family in the future, goes to satisfy creditors’ claims especially as the circumstances of the debts were beyond the family’s control.
There are statutory rules on managing gifts to a bankrupt beneficiary, executors who fall foul of these rules face no end of bother. We’ll do well to remember a bankruptcy order prevents the bankrupt person from controlling their assets. A ‘trustee in bankruptcy’ controls their assets. The Insolvency Act 1986 authorises a trustee in bankruptcy to claim the assets of the bankrupt person until they’re discharged. This would include any gifts or inheritances the bankrupt person has the right to receive.
Handling a Bankrupt Beneficiary
There are tested, tried and simple ways to handling a bankrupt beneficiary. Bear in mind that few can see far ahead when we, or our beneficiaries could run into financial trouble. Let us borrow a phrase from recent happenings. When covid was our greatest concern, to be safe from catching the virus, treat everyone as if they have it. That’s a roundabout way of saying ‘treat every beneficiary of every will as if they were already bankrupt’.
In drafting our wills, if we want our wealth, be it modest or grand to serve our kith and kin rather than go to service some debt (or even divorce claim). We should all act as if our beneficiaries had the sword of financial ruin dangling over their heads – thus we should apply two prophylactics.
The first is to appoint a professional executor. As in all matters, an experienced hand can deal with these matters better and faster than a lay person. The second and more important solution is to leave gifts in wills to discretionary trusts. Trusts of which the intended beneficiary of the gift in the will would have the use, but not the ownership of the asset. The gifted assets are not the beneficiary’s , therefore they could not be taken to satisfy creditors’ claims.
These two actions would ensure your parents’ assets went to their family, rather than to pay off creditors especially in these days where the circumstances of the debt, and the bankrupt beneficiary were a nasty case of bad luck.