Distributing Deceased Assets to Bankrupt Beneficiaries

On distributing estate assets, the personal representatives should obtain good receipt from the beneficiaries. We look at the new Law Society Practice Note on making distributions where there is a potentially bankrupt beneficiary.

This important guidance is aimed at all private practitioners, staff and managing partners involved in estate administration, and gives important advice to solicitors who need to make distributions out of an estate where a beneficiary is bankrupt.

What are the risks?
The Society explains that where a distribution is made to bankrupt person, the PRs may not be able to receive a good receipt if the distribution is made to the wrong person. The risk is the trustee in bankruptcy could make a compensation claim against the PRs for the amount of the payment to the bankrupt; or the value of the assets transferred to the bankrupt if the bankrupt beneficiary puts the assets beyond the reach of the trustee in bankruptcy.

The PRs might not be able to recover those assets in light of restrictions under section 285 of the Insolvency Act 1986 on bringing proceedings against bankrupts.

The guidance usefully explains the legal basis to a claim to the inheritance of the bankrupt beneficiary, including:

• the legal position of the beneficiary of a bankruptcy prior to the testator’s death (after-acquired property vests in the bankrupt, but only if it has served notice under s333 of the Insolvency Act 1986 to the trustee in bankruptcy), or
• bankruptcy after death (the inheritance vests in the trustee in bankruptcy).

If the beneficiary has been discharged at the date of the deceased’s death, the trustee in bankruptcy has no claim.

What are the PRs’ obligations?
The Guidance says: “Where the personal representatives are aware that the beneficiary became bankrupt before the deceased's death, they can, before making any distribution to the bankrupt, insist on seeing the section 333 notice regarding the after-acquired property.”

Once the notice has been provided, the PRs should confirm with the trustee in bankruptcy that they have served a notice on the bankrupt under section 307(1) of the 1986 Act, or intended to serve such a notice. When this is complied with, the PRs can distribute the property to the trustee in bankruptcy (who can give good receipt).

However, if no such notice has been served (or intended to be served) by the trustee in bankruptcy – the PRs can then distribute the property to the bankrupt beneficiary - who can then give good receipt.

The guidance gives helpful advice to practitioners in circumstances where it is unclear whether a beneficiary is bankrupt or not; further steps that can be taken; and how to deal with unusual requests with regards payments to beneficiaries. It is important to reduce your own exposure to the risk of a claim.

The Practice Note can be found here



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