Inheriting While Bankrupt in Alberta: Can Creditors Take Your Share?

Someone has died and left you a gift in their will, but you are bankrupt or thinking of filing. You may be worried that the money or property will simply go to your creditors. That worry is reasonable, because timing matters a great deal.

This article explains the general rules in plain language, including what the executor has to do and what happens if a gift fails. It is not a substitute for advice. Your Licensed Insolvency Trustee and a lawyer can look at your actual dates and documents.

This article covers the law of Alberta.

Why an inheritance can reach your creditors

Under the federal Bankruptcy and Insolvency Act, the property of a bankrupt that is divisible among creditors includes property the bankrupt holds on the date of bankruptcy. It also includes property that may be acquired by or devolve on the bankrupt before discharge.

In practical terms, an inheritance you receive before you are discharged can fall to the trustee in bankruptcy. That can be true even if the person who died did so after you filed. What matters is the rules and the timing, so do not assume either way.

What stays outside the reach of creditors

The Act sets out exceptions. Property the bankrupt holds in trust for another person does not go to creditors. Neither does property that is exempt from execution or seizure under the laws of the province where it is situated and where the bankrupt resides.

Whether any part of your inheritance fits either exception depends on what the gift is and on the provincial rules, which this article does not set out. Your Licensed Insolvency Trustee and a lawyer can tell you whether anything applies to your situation.

What the executor has to do

A personal representative must act honestly and in good faith, follow the will, and distribute the estate as soon as practicable. Their core tasks are identifying assets and liabilities, administering the estate, paying debts, and distributing and accounting for the estate.

There is also a built-in wait. The personal representative must not distribute to a beneficiary until 6 months after the grant, unless all family members consent or the Court authorizes it. This protects dependants' maintenance and support claims, which can be brought within 6 months after the grant. An executor who distributes early is personally liable for any maintenance and support that should have come out of that amount.

• Before the 6 months end, the executor may make reasonable advances for the maintenance of family members who are beneficiaries.
• Once notice of a maintenance and support application is given, the executor must not distribute except as the court orders.
• If the executor is unsure who should receive a share, they can apply to the court for directions, and a trustee who follows those directions is discharged from the duty on that matter.

When a gift fails: who receives it instead

A gift can fail if the beneficiary died first, or if it is void, contrary to law or disclaimed. The same order of substitution applies in each case. A failed gift passes in this order:

• To the alternate beneficiary named in the will, if there is one.
• If there is none and the beneficiary was a descendant of the person who made the will, to that beneficiary's descendants who survive the will-maker.
• Otherwise, to the surviving residuary beneficiaries named in the will, in proportion to their interests.
• If none of those people can take, as if the person had died without a will.

A will can name an alternate, and a named alternate takes first. Whether other wording in a will can change this order is worth confirming with a lawyer. Because the rules for gifts that fail are complicated, and a bankruptcy can affect who ends up with the value, do not take any step to give up a gift without advice first.

What to do next

• Tell your Licensed Insolvency Trustee about the death and the possible gift as soon as you learn of it.
• Write down the date of death, your date of bankruptcy and your expected discharge date.
• Get a copy of the will, or ask the executor what you are named to receive.
• Do not sign a release, transfer or any document about the gift until you have advice.
• Speak with a lawyer about whether any exception applies and what your options are.

If you are the executor, keep records, follow the 6-month wait, and consider asking the court for directions if you are unsure whether a share should be paid to a bankrupt beneficiary or to their trustee.

Frequently asked questions