Inheritances from deceased estates can result in some of the largest funds received by individuals in their lifetime. Usually the major asset in a deceased estate is the real property owned by the deceased at the time of their passing.
In some instances life tenancies are provided by the deceased in their Last Will and Testament (Will) which can cause some deceased estates to last for many years after the date of death.
What may not be well known, is that whilst a person is bankrupt, any inheritance they are entitled to receive from a deceased estate will be claimed by a Trustee in bankruptcy.
Life Tenancy
A Will may provide for a life tenancy in a property owned by the deceased to a person, whether or not that person is a beneficiary of the estate.
Some examples that we have seen in the past include life tenancies granted to:
- the deceased’s child, with the monetary interest in the estate granted to the deceased’s grandchild; and
- the deceased’s bankrupt child, with the monetary interest in the estate divided equally between the deceased’s children (including the bankrupt child).
Vesting of Assets in Bankrupt Estate
Other than specific exemptions, under the Bankruptcy Act 1966 (Act) the assets of the bankrupt vest in the Trustee of the bankrupt estate that:
- exist at the time of the commencement of the bankruptcy (Pre-Bankruptcy Assets); or
- are acquired (or devolved) upon the bankrupt after the date of bankruptcy and before the date of their discharge (After-Acquired Assets)
Revesting of Assets to the Bankrupt
An asset (either Pre-Bankruptcy Assets or After-Acquired Assets) that vests in the Trustee does not return to the bankrupt (i.e. revest) upon their discharge from bankruptcy.
A Trustee has the following time limits to realise the assets of the estate:
- 6 years from the date of discharge, where that asset is disclosed in the bankrupt’s Bankruptcy Form/Statement of Affairs (SoA) and is a Pre-Bankruptcy Asset;
- 6 years from the date of discharge, where the asset is disclosed to the Trustee prior to the bankrupt’s discharge and is an After-Acquired Asset; and
- 6 years from the date of notification, where the asset is disclosed to the Trustee after the date of the bankrupt’s discharge and is an After-Acquired Asset.
The Trustee is entitled to extend these revesting times for an unlimited number of extensions as long as each extension is no longer than 3 years or that it is within 3 years of a specified event (e.g. the death of a life tenant).
In circumstances other than those outlined above, the revesting time is 20 years from the date that the bankruptcy commenced.
Limiting Exposure to Deceased Estate Vesting in Trustee
The death of a loved one is often unexpected and, therefore, if a person is bankrupt it is important that they limit the amount of time that they remain bankrupt given the risk of an interest in a deceased estate vesting in their Trustee.
This would involve:
- lodgement of their SoA as soon as possible upon notification of the bankruptcy; and
- ensuring they comply with their duties under the Act so as to avoid a situation where the Trustee objects to their discharge, thereby extending their bankruptcy by up to 5 years.
Life Tenancy Issues for Bankrupts
Additionally, the granting of a life tenancy to a bankrupt may have unintended consequences for the bankrupt in terms of income contribution assessments. Even though the bankrupt is not receiving what is traditionally thought of as “income” for income tax purposes, the Act specifies certain situations where the free use of property may also be deemed as income for the purpose of the income assessment.
This may result in the bankrupt being liable to contribute to their estate even though they are not receiving a specific cash benefit.
Case Studies
The Adelaide office has recently been involved in two matters where deceased estates with life tenancies have caused issues for the bankrupt (and the Executor(s) of the deceased estate).
Pre-Bankruptcy Interest in Deceased Estate
The circumstances of this matter were as follows:
- The bankrupt’s Grandmother died in 1989.
- The Grandmother’s Will granted a life tenancy in the Grandmother’s property to the bankrupt’s mother, with the monetary interest in the estate (including any surplus value of the property) bequeathed to the bankrupt (at the time of the death of the bankrupt’s Grandmother the bankrupt was not bankrupt).
- The bankrupt had declared herself bankrupt multiple times: in 1999, 2009, 2014 and 2017.
- The bankrupt’s mother died in July 2019 thereby finalising the life tenancy over the Grandmother’s property and triggering the bankrupt’s monetary interest in the deceased estate.
- At the time of the bankrupt’s mother’s death, the bankrupt had been discharged from each of her estates, except for the 2017 estate.
Alan Scott of the Adelaide office was the Trustee of the 2009 bankruptcy and the Official Trustee in Bankruptcy (OT) was the Trustee in the other estates. The OT subsequently transferred the administration of each of the estates to Mr Scott.
During the administration of the 2009 estate, we were aware of the bankrupt’s interest in the Grandmother’s deceased estate (this was disclosed to us by the bankrupt after lodgement of her SoA), however we had not been made aware of the prior (1999) bankrupt estate.
During the process of liaising with the Executor of the Grandmother’s estate, we became aware of the earlier bankruptcy. Upon obtaining the bankrupt’s SoA in the 1999 estate, we became aware that the bankrupt had not disclosed her interest in the deceased estate in her SoA.
As a result, the bankrupt’s interest in the deceased estate vested in the 1999 estate on the basis that she had not disclosed her interest in the deceased estate in that SoA, with the 20-year limitation applying in respect of that estate.
In this case, the bankrupt’s 1999 estate was annulled by payment of the debts in full with the balance of the deceased estate vesting in the 2017 estate. The funds from the deceased estate were also sufficient enough to annul the 2017 estate by payment of the debts in full.
The 2009 and 2014 estates did not receive any benefit from the deceased estate or the 1999 bankrupt estate as at the time that the 1999 estate had been annulled (and therefore the surplus funds became available to the bankrupt) the bankrupt had already been discharged from the 2009 and 2014 estates. Had she been also discharged from the 2017 estate at that time, the surplus funds would have been returned to the bankrupt.
Whilst the funds were sufficient to annul the 1999 and 2017 estates, it should be noted that a creditor has the right to claim interest (on interest bearing debts) post-bankruptcy. Interest over 20 years can be substantial and in this case, the bankrupt was fortunate that no creditors with interest bearing debts claimed in the 1999 estate otherwise the situation may have been different.
Post-Bankruptcy Interest in Deceased Estate
The circumstances of this matter were as follows:
- The bankrupt was made bankrupt by a Sequestration Order in 2003;
- The bankrupt failed to file a SoA;
- The bankrupt’s mother died in 2018;
- The bankrupt’s mother’s Will devised the estate to her children equally (including the bankrupt) along with granting a life tenancy in her property to the bankrupt.
- The bankrupt filed the SoA in 2018.
Whilst the death of the bankrupt’s mother occurred some 15 years after the date of bankruptcy, the bankrupt was not yet discharged due to the failure to file a SoA. On this basis, the bankrupt’s interest in the deceased estate vested in the Trustee.
As the bankrupt has a life tenancy, the Trustee’s interest in the deceased estate will continue until such time as the bankrupt either terminates the life tenancy or passes away.
This matter is ongoing, however it has caused significant issues for the bankrupt and the executors of the deceased estate.
This is a prime example of the importance of a bankrupt complying with their obligations to ensure that are discharged at the earliest possible time, and the difficulties that can be encountered where a bankruptcy is extended beyond the minimum 3-year period.
Article written by Travis Olsen (Associate Director) – Adelaide