Inheritance When a Beneficiary Is Bankrupt in British Columbia

You may be named in a will while you are bankrupt, in a consumer proposal, or simply deep in debt. Or you may be the executor, wondering what to do about a beneficiary who owes money. In both cases the questions are the same: can the inheritance be taken, and does timing change the answer?

The answer depends heavily on federal bankruptcy law and on the dates involved, which is beyond what this article can settle. What it can do is explain the estate-side rules that affect timing and who is entitled to information, so you know what to ask a lawyer or a licensed insolvency trustee.

This article covers the law of British Columbia.

Two separate sets of debts

It helps to keep two things apart. The first is the deceased person's debts, which the estate must deal with before beneficiaries receive their gifts. The second is the beneficiary's own debts, which are owed to the beneficiary's creditors and are not the estate's problem.

On the first, if the estate cannot pay all debts and gifts, WESA s. 50 sets the order in which property is reduced, starting with property specifically charged with a debt or left on trust to pay a debt, then the residue, then general legacies, then specific legacies. If the estate is insolvent, WESA s. 170 sets an order of payment that begins with reasonable funeral and administration expenses. The inheritance a beneficiary actually receives may therefore be smaller than the will suggests.

On the second, whether a beneficiary's creditors or a trustee in bankruptcy can claim the inheritance is a question of bankruptcy law and the specific facts. It should not be assumed either way.

How the estate timetable affects the inheritance

Timing is often what decides how a beneficiary's situation is handled, so it helps to know when money can actually move. Except by court order, a personal representative must not distribute the estate within the 210 days after the grant is issued. That period runs from the grant, not from the date of death.

• With a will, early distribution is possible if all beneficiaries with an interest and all persons who could bring a wills variation claim consent.
• With no will, early distribution is possible if all intestate successors entitled to a share consent.
• The personal representative may also go ahead if they set aside the gifts or shares of beneficiaries who cannot be located, plus enough to satisfy any wills variation claim. If they do not, they are personally liable for resulting loss.
• Even after 210 days, distribution needs court consent if a proceeding has started over who is a beneficiary, if wills variation relief is being sought, or if other proceedings may affect distribution.

If you are a beneficiary in financial difficulty, think carefully before signing a consent to early distribution. Your consent may be required for it to proceed, and what you sign can matter to your creditors or your trustee. Get advice first.

What the executor must tell and account for

Each beneficiary under the will must receive notice of the proposed probate application, along with a copy of the will. The application cannot be filed until at least 21 days after the notice is delivered. The notice must also tell beneficiaries that the applicant has to provide an accounting of how the estate was administered and how its assets were distributed.

An executor or trustee under a will must pass accounts within two years of appointment, and a person beneficially interested can serve notice requiring annual accounts. Those accounts show what the estate held, paid and distributed, which can matter if someone later asks what a beneficiary received and when. An executor unsure how to handle a beneficiary's situation may apply to the court for directions.

If the bankrupt person is the executor

A different situation arises when it is the executor who is in bankruptcy. Being an undischarged bankrupt is one of the grounds on which the court may remove or pass over a personal representative. Any person with an interest in the estate may apply. A creditor may apply on the bankruptcy ground only if their claim exceeds a prescribed amount.

If a personal representative is removed, the court must appoint a substitute who consents to act, unless the estate is fully administered or no new appointment is needed.

What to do next

• Get advice from a lawyer and a licensed insolvency trustee before accepting any inheritance, agreeing to early distribution or making any transfer.
• Be open with your trustee or insolvency professional about an expected inheritance, and ask them how it should be reported.
• If you are the executor, keep careful records of what you pay and distribute, since you may have to account for it.
• Check the dates: when the grant was issued, when the 210 days end, and when any bankruptcy or proposal began.
• Do not move estate property to a third party to keep it from creditors without advice.

Frequently asked questions