The loss of a family member is a difficult time. In addition to dealing with grief, there are typically practical issues (cleaning up and vacating a property, organising new living arrangements for dependents left behind, notifying friends and extended family) and legal matters to attend to, such as dealing with the Will (hopefully there is a Will) and commencing the administration and distribution of the Deceased’s property.
The exact wishes of the family member may not be known until the dust settles and the Executor/s of the Will review the terms of the Will and commence identifying and preparing to distribute the family member’s property.
The above matters become even more complex and emotionally challenging when the family member is themselves insolvent and/or a beneficiary is anticipating being declared bankrupt or is currently an undischarged bankrupt.
Insolvent Deceased Estates
If a family member passes and they do not have sufficient property/assets to pay all of their due and payable debts, their Deceased Estate may be insolvent.
In the above scenario, an Executor or Personal Representative of the Deceased has obligations to ensure the Estate is dealt with appropriately, which may involve seeking specialist advice and applying to Court to have the Deceased Estate administered by a trustee in accordance with Part XI of the Bankruptcy Act 1966 (Part XI Administration – the insolvent administration of the deceased estate).
A Part XI Administration is a modified version of a bankruptcy. In essence, the property of the Deceased Estate is recovered by the Trustee, investigations are conducted into the affairs of the Deceased and if sufficient funds are available, a dividend is paid to creditors.
Insolvent Beneficiaries
Due to the private and confidential nature of being bankrupt, the fact a beneficiary of a Will is in financial difficulty or is an undischarged bankrupt may not be known by family members. If it is not known, the terms of a Will and gifting of inheritances can have unintended consequences.
If a person in financial difficulty becomes entitled to receive an inheritance prior to their bankruptcy, their inheritance is usually divisible property and will vest in their bankruptcy trustee upon their bankruptcy.
Suppose a person has been declared bankrupt and they become entitled to receive an inheritance prior to their discharge from Bankruptcy (which is usually 3 years after they file their Statement of Affairs / Bankruptcy Form, but maybe longer). In that case, their inheritance is usually divisible property and vests in their bankruptcy as an asset of their Bankrupt Estate. This is commonly referred to as the after-acquired property of a bankrupt.
Inheritances can be quite substantial (e.g. an interest in an unencumbered family home) and it can be heartbreaking to realise they may not receive an inheritance gifted to an insolvent beneficiary or undischarged bankrupt. Some of the practical implications of dealing with bankruptcy and deceased estates are explored in these articles – Deceased Estates and Bankruptcy, Case Study: Deceased Estate and Annulment and Life Interests in Property.
SV Partners are experienced in dealing with the above situations. If you or your client come across unfortunate circumstances where deceased estates and insolvency collide, we are here to help. Contact your local SV Partners’ office today for specialist advice and assistance.
Article written by Daniel Luckman (Senior Manager) – SV Partners Sunshine Coast