A personal representative of an Estate should be wary of paying out legacies to persons whom they know or believe to have been made bankrupt. The Official Assignee in Bankruptcy is appointed over all of the property of the bankrupt and therefore such property vests automatically in the Assignee under section 44 of the Bankruptcy Act 1988. This includes the right to assets in an estate on the date of the bankruptcy order even if has not yet been distributed.
If a personal representative pays the legacy to the undischarged bankrupt rather than the Assignee they will not receive a good receipt for the legacy as the assets are put beyond the reach of the Assignee. The personal representative may be held personally liable for their actions by the Assignee or the creditors if they cannot recover the legacy from the bankrupt. However a personal representative acting in good faith for value without notice of the bankruptcy is protected as are their successors in title. It is recommended that a bankruptcy search is carried out against the beneficiary to ascertain his/her status at the commencement of administration and at the time that the estate distribution is being made.
A bankrupt is required to disclose the full nature and extent of any property acquired after he is adjudicated bankrupt to the Assignee and failure to notify the Assignor is a criminal offence. If the bankrupt becomes a beneficiary of an estate after the date of the Bankruptcy Order, the interest vests in the first instance in the bankrupt. However the Assignee may elect to claim the after acquired asset under the 1988 Act. The Assignor will claim the asset if it can be realised for the general benefit of the creditors. The Assigner has 12 months to claim the property once he is made aware of it. We would recommend that a personal representative obtain confirmation that the bankrupt has notified the Assignee of his legacy in these circumstances. This may also be relevant for the forthcoming Personal Insolvency Act where similar steps should be taken before any distribution is made.
In cases where a beneficiary is based outside of Ireland a personal representative must seek legal advice from a lawyer qualified in the jurisdiction where the beneficiary resides or conducts his/her business. Under the European Insolvency Regulation foreign bankruptcies and judgments may be recognised in other EU Member States.
Therefore it is recommended that a testator, who is aware that a beneficiary has been or may be made a bankrupt, reviews their will and takes legal advice on estate planning. The testator may wish to amend their will temporarily for the period of bankruptcy or they may wish to set up a trust to avoid their wealth discharging a beneficiary’s debts. Using a well drafted discretionary trust will allow the trustees of the estate to control the distribution of the assets and protect the assets from third party claims. In order to provide effective asset protection the trust should provide sufficient powers to trustees to adjust to changing circumstances of the beneficiaries and be flexible enough to enable distribution to a beneficiary who emerges from his financial difficulties if the testator so wishes.
This article is a general review of the law on the subject and is not intended to be a complete statement of the law. Specific legal advice must be sought on a case by case basis. For more information please contact Helen Sweeney.