How Bankruptcy May Affect a Will Dispute

In Will Disputes, the financial situation of all involved is one of the most important aspects considered and can change the way a case is resolved.

Financial health is often indicated by annual salary, property portfolios and superannuation; and financial issues such as bankruptcy (of either the estate or a beneficiary seeking further provision) can add further complications to a Will dispute

Insolvent estates

If a deceased has debts, then the executor of a Will must use the assets of the estate to settle those debts before the estate can be distributed to any beneficiaries.

If there are no assets, or an insufficient amount of assets to pay all the deceased’s creditors then the estate becomes ‘insolvent’. I.e., the deceased persons had debts in excess of the value of their estate.

In such cases where the estate is insolvent, then potential beneficiaries will be excluded from the provision as the executor(ix) will need to use whatever remaining funds available to pay off the deceased’s respective creditors.

The process of repaying the creditors does not happen automatically. The executor(ix) will still have to apply for a grant of probate to ensure all assets are released correctly for distribution as well fulfil the remainder of their role as normal. Once the funeral, testamentary and administrative expenses are taken care of, then the creditors are repaid and the estate finalised. There is no room in an insolvent estate to dispute its division of funds.

Bankrupt plaintiff’s success in contesting a Will

As previously mentioned, an applicant’s financial position is one of the key elements considered by the Courts when deciding whether or not that particular individual has the right to further provision from the deceased’s estate.

However, bankruptcy is not a recipe for guaranteed success. It is no secret that bankruptcy will indicate that an individual is in dire financial straits and may give them a better chance at succeeding, but along with the length of time someone has been declared bankrupt for, and whether they are now back to receiving a stable income, the Court also has other important conditions to inspect. Eg, the relationship between the applicant and the deceased, the physical, mental or intellectual state of the applicant, any benefits the deceased had previously given to the applicant during their lifetime, whether the applicant was ever maintained by the deceased wholly or partly before their death and significantly, the financial position of the estate.

In saying that, the consequences of inheriting any financial sum from the deceased during bankruptcy can have dire repercussions.

Receiving an inheritance during bankruptcy

In Victoria, if a beneficiary is bankrupt, then the bankruptcy legislation requires that any inheritance should be paid to the trustee in bankruptcy. The bankrupt person will have to use the inheritance to pay the creditors, costs of the bankruptcy administration as well as the trustee’s costs. Only after that is all finalised will they receive any surplus.

To avoid this situation, certain bankrupts have in recent years failed to disclose the receipt of inheritances so to avoid having to hand over their newly acquired funds. However, in the cases documented, the trustee in bankruptcy has discovered the fraudulent behaviour and not only did the bankrupt beneficiaries need to hand over the proceeds, but they were also subject to prosecution in the Magistrates Court. Depending on the severity of the situation penalties for such a crime ranged from community service to imprisonment.

To avoid such a situation occurring, careful Estate planning is required and legal advice should be sought. Consequently, if you are an executor(ix) of a Will, or a potential beneficiary who wants to contest yet are uncertain about financial situations and repercussions, do not hesitate to contact the team at Hentys Lawyers today.