Will drafting bankruptcy clause

Would any members be able to point me in the direction of a precedent clause that I can incorporate into a Will which allows the executors to bypass any beneficiary who is or may at the death of the Testator be a bankrupt? In the event of bankruptcy the share going to bankrupt would instead pass to his children.

Thank you

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I think this as described would be difficult. There are protective trusts which protect capital but allow beneficiary to have income but I’d imagine the best solution here would be a discretionary trust with a detailed letter of wishes.

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Hi Sharon,

I’d suggest the trustee of the bankruptcy, should they be made aware of the will clauses may, should the inheritance fail, possibly petition the court for the funds.

It would depend on if the testator foresaw the beneficiary may enter bankruptcy, arguably if the will clause was instigated to a 12-year-old child and then 15 years hence they became bankrupt the position maybe different.

As the clause could possibly fail (trustee argues successfully) – I always advice against such clauses, especially if it appears the proposed beneficiary is in such a position to be made bankrupt.

Richard Bishop

The traditional device was a protective trust, a life interest that determined automatically in defined forfeiture events, and it has certain special tax treatment. For IHT see s88 IHTA 1984 adapted so as to operate after 2006 just as before. Trustees could be permitted to override forfeiture in specified circumstances or at discretion.

The modern drafting practice has grown up of just giving the trustees discretion in the first place with a letter of wishes, as mentioned by Tdls below. In a lifetime settlement a classic protective trust after 2006 will not be a qualifying IIP in any case. In a Will trust if you want an IPDI you will have to confer a life interest but make it revocable at the trustees’ discretion or simply subject to an overriding power of appointment, with a letter of wishes and a wider class of alternative beneficiaries including the original beneficiary. One prevailing school of thought is that this is more flexible than s33 TA1925 or some customised adaptation of it and s88 IHTA.

Bankruptcy is not always a result of the beneficiary’s total irremediable financial incontinence and may just be a misfortune like being self-employed but outside the warm but selective embrace of Uncle Rishi and his SEISS. Also it may be temporary and relatively quickly discharged in which case direct payments thereafter could be what the settlor would have wanted.

Jack Harper

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