Bankruptcy and Inheritance

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Craig Butler

27 June 2014
Wagga Wagga NSW
My partner declared bankruptcy in October of last year. Her father passed away sometime after this. Today she has learnt that he has left her $2000. Will she be able to keep this money or will she lose it?


Hi Craig,

In short yes.

This is a common issue in bankruptcy, i.e. where the beneficiary under a Will is bankrupt at the time of their inheritance. The Bankruptcy Act defines divisible property (the property that is available for distribution to creditors by the trustee), to include not only property owned at the time of bankruptcy but also property acquired afterward, such as an inheritance. Therefore, if a bankruptcy inherits money or property under a will, that property forms part of the assets available to the trustee for distribution to creditors.

Obviously, if the Will can be changed (if the benefactor is still alive) to remove the gift to the bankrupt individual, the problem can be avoided. However a better solution may be to include in the Will a clause which basically states that in the event a beneficiary is bankrupt, their gift under the will is held on testamentary trust. A good succession lawyer can draft this for you.

Hope that helps.
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