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09th December 2011

Estate Administration - Bankrupt Beneficiaries

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Personal representatives (PRs) must take care not to make a distribution out of the estate of a deceased to a beneficiary who is or has been bankrupt.  PRs could otherwise find themselves personally liable to the bankrupt’s creditors and compensation may be sought from them.

Upon death a deceased’s estate is entrusted to his or her PRs. Amongst other matters, the PRs settle any debts the deceased may have had at the date of death before distributing the residue of the estate amongst the beneficiaries under the Will or on intestacy.

However, before distributing the assets, it is the duty of the PRs to ensure that none of the beneficiaries are bankrupt. The position of each individual beneficiary must be ascertained immediately before distribution of the residue of the estate rather than months before the distribution takes place.

Bankruptcy searches can be done online or by post at the Land Charges Department. A small fee is applicable. The search will show whether the beneficiary has had a bankruptcy order (or petition) made against him or her within the previous 5 years, unless a court order cancelling the registration has been made. It is imperative to double-check the correct spelling of the beneficiary’s name before searching against his or her name.

Should the result of the search be positive, two situations must be taken into account before the PRs should consider distributing the residue of the deceased’s estate:

1. Death occurring before bankruptcy: If the beneficiary is entitled to undistributed property at the time the bankruptcy order is made, the trustee in bankruptcy must receive the assets. This is the case whether of not the bankrupt has been discharged since the order was made.

2. Death occurring after bankruptcy: In these circumstances any cash or assets due from the estate is referred to as ‘after-acquired property’. The bankrupt beneficiary is required to give notice of the after-acquired property to the trustee in bankruptcy within 21 days. The trustee in bankruptcy may then decide to serve notice on the beneficiary within 42 days to claim such property. So that the PRs can be absolutely certain that they are making the distribution to the appropriate person, they should request that the beneficiary give notice to the trustee in bankruptcy and await the trustee’s reply (if any) before then making the distribution from the estate.

If however the beneficiary is found not to have any bankruptcy orders (or petitions) made against him or her, or where he or she was discharged before the death of the deceased, the residue of the estate can be passed on as per the wishes of the deceased.

Extra care must also be taken in respect of beneficiaries who are subject to an Individual Voluntary Arrangement (IVA) as similar steps need to be taken before the distribution should be made.

In cases where the beneficiaries are based outside of England and Wales the PRs should seek legal advice from an insolvency lawyer who is qualified in the jurisdiction in which a beneficiary has his or her centre of main interests.

If you are a PR and would like to receive further details on this particular issue, or general advice on or assistance with the administration of the estate of a deceased, please contact Hewitsons’ Private Client team on 01604 233233.