Handling a Bankrupt Beneficiary

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.  My parents worry my brother’s inheritance from them 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 on the Rampage

Late on that Wednesday morn, a middle-aged Cumbria man 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 who had worked on gunman’s father’s will. Till this day from then, the killer, Derrick’s motives are murky – he turned his gun on himself. Thus, the rumours of his reasons came out like soldiers on parade.

Bankrupt Beneficiary
A Bankrupt Beneficiary Properly Handled

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 bankrupt beneficiaries, 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 has the right to receive.

Handling Bankrupt Beneficiaries

There are tested, tried and simple ways to handling beneficiaries in bankruptcy. 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 contemporary goings on. To be safe in from catching this virus, treat everyone as if they have it. And, to prevent its spread, behave as if you have it.

 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 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 were a nasty case of bad luck.