Executors and the Bankrupt Beneficiary

Executors and the Bankrupt Beneficiary

As the executor of a deceased estate, you may be on the receiving end of distressing communications with beneficiaries demanding that you take shortcuts in the administration of the estate and, in some cases, make distributions of assets to them immediately.  If, this sort of pressure is being applied to you, be aware of the risks and liabilities associated with distributing an estate too soon. 

Bankrupt Beneficiaries 

If you are receiving demands from a beneficiary to distribute the assets of an estate as a matter of urgency, we strongly recommend that you check whether the beneficiary (indeed any of the beneficiaries) are registered bankrupts.  This is an easy search that can be conducted on the National Personal Insolvency Index (NPII). 

Bankruptcy law1 provides that ‘after acquired property of the bankrupt’, for e.g., an inheritance, ‘vests, as soon as it is acquired by or devolves on the bankrupt’, in the trustee in bankruptcy.  This is because (and skip this next bit if we are going into too much detail) a beneficiary of an estate has a chose in action before the assets of the estate are received.  In other words, a beneficiary has an enforceable right to the proper administration of the estate by the executor as well as an expectation that their assets will pass to them with all liabilities and costs being paid.  In the case of a bankrupt beneficiary, this ‘chose in action’ or ‘right’ passes to the trustee in bankruptcy. 

What must an executor do upon finding out a beneficiary is a bankrupt? 

An executor, upon finding out a beneficiary is a bankrupt, must contact the trustee in bankruptcy to ascertain how much of the bankrupt beneficiary’s inheritance must be paid to the trustee in bankruptcy before the surplus (if any) is distributed to the beneficiary.  If an executor deliberately or through ignorance, makes a full distribution of their inheritance to the bankrupt beneficiary instead of the trustee in bankruptcy, the executor could be personally liable to the trustee in bankruptcy. 

Dealing with bankrupt beneficiaries who are family or friends 

Often executors and beneficiaries are friends or family members.  This may put the executor in a difficult position if the bankrupt beneficiary asks the executor to delay the administration of the estate and hold onto the money until the beneficiary has been discharged from bankruptcy.  Don’t do it.  Such an act is an attempt to defraud the creditors of the bankrupt not to mention a breach of your obligation to administer the estate properly. 

Tips 

A couple of tips before we go.  An executor should: 

  • In all cases, check whether a beneficiary is a bankrupt; and 
  • Not distribute the assets of an estate earlier than 6 months after probate or if, you have received notice of an intention to make a family provision claim which has not been commenced, at least 12 months after the date of probate. 

How we can help 

ADLV Law has been helping executors administer deceased estates for 20 years.  If you have a question about your role, its responsibilities, and risks, contact us on 1300 654 590 or email us.

 

The information contained in this post is current at the date of editing – 22 September 2023.

 

1 Section 58(1)(b) of the Bankruptcy Act 1966 (Cth) 

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