Saturday, November 08, 2014

Are Future Payments from a Trust Created by Will Available to the Creditors of a Bankrupt?

If you make a will leaving your estate to your child, and after your death, your child is assigned into bankruptcy, then your child’s inheritance from you will be available to his or her creditors. That’s not too surprising.

But what if the will provides that your child is to receive her inheritance in stages, with so much payable when she reaches a certain age, more payable and a later age, and all of it payable at a later age still? After your death, but before she has reached the age to receive the full amount of her inheritance, she is assigned into bankruptcy. Will her trustee in bankruptcy be entitled to the future payments for the benefit of her creditors?

This issue was considered by Master Baker in re Bolt Estate, 2014 BCSC 2095.

Vesta Bolt died in 1994. In her will, which she made in the year of her death, she left most of her estate in trust for her daughter, Jody Bolt. The terms of the trust provided that her daughter would receive income from the trust, one-quarter of the capital when she attained the age of 26, one-quarter at the age of 35 and the balance at the age of 45. If she died before attaining the age of 45, whatever was left in the trust would go to her descendants per stirpes (equally among her children, and if a child died before her, the children of that deceased child would receive the deceased child’s share).

In January 2014, before attaining the age of 45, Ms. Jody Bolt made an assignment in bankruptcy. There remains a little over $96,000 in the trust created by her mother’s will She argued that future payments from the trust were not property available to her creditors.

Her trustee in bankruptcy took the contrary position that the future payments were available to her creditors, pointing to the definition of property in section 2 of the Bankruptcy and Insolvency Act:

“property” means any type of property, whether situated in Canada or elsewhere, and includes …every description of property, whether real or person­al, legal or equitable, as well as …every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property….

Master Baker agreed with the trustee in bankruptcy’s submissions. Ms. Bolt as a beneficiary of her mother’s will has a contingent interest in the remaining assets of the trust, which falls within the above-quoted definition of property available to her creditors.

The future payments were not exempted in either the Bankruptcy and Insolvency Act, or the Court Order Enforcement Act.

However, because her interest in the remaining capital of the trust is contingent on her attaining the age of 45, the trustee in bankruptcy will also have to wait until she attains that age before the trustee in bankruptcy can receive those funds to distribute to the creditors. The trustee in bankruptcy can have no greater right to the funds than she. If she died before attaining the age of 45, the remaining capital of the trust would go to her children pursuant to her mother’s will.

In this case, it is very doubtful that the will-maker would have contemplated her daughter’s bankruptcy twenty years after the will-maker’s death. But what can you do if you have a child, or other person you wish to benefit, who is either in bankruptcy or in such financial difficulty that you can see a significant risk that after your death, he will be bankrupt?

One option is to create a discretionary trust in your will for your child and his family. You select a trustee for your child’s trust, and the terms of the trust provide that your trustee can decide if an when to make payments to your child, his spouse, his children and other descendants, and whoever else you wish to include among the potential beneficiaries. In these circumstances, you would not select your child as the trustee. If, after your death, your child is assigned into bankruptcy, your trustee need not make payments to your child, but instead can assist his family by making payments to or for the benefit of his spouse or children. Even if your child’s interest is considered “property” under the Bankruptcy and Insolvency Act, it is arguably of little or no value, your child’s interest being subject to the exercise of your trustee’s discretion. 

No comments: