Can a Trustee in Bankruptcy Touch My Inheritance? YES!

If you declare bankruptcy, can the trustee in bankruptcy touch your inheritance?  

The answer is YES.  

(Re) Bolt Estate, 2014 BCSC 2095 

A trustee had applied to the court for an order that the bankrupt’s entitlement and benefits under a will were property that vested and formed part of the bankrupt party’s estate. 

The bankrupt had been included in a will in 1994 and was left the residuary of an estate. 

The details of the residuary were on the following terms:

a)      That the income from the trust be paid to Ms. Bolt until the age of 26 years, provided she is a full-time student;

b)      That at the age of 26 she receive ¼ of the capital of the trust;

c)       That she continue thereafter to be paid the interest from the trust;

d)      That at the age of 35 she receive ¼ of the capital of the trust;

e)      That at the age of 45 years she receive the balance remaining of the capital of the trust.

As the bankrupt, Ms. Bolt, was nearly 40 at the time of trial, she had already received a portion of the estate. 

Ms. Bolt brought an argument that the receipt of the balance of the trust relies on “mere chance” and it would frustrate the intent of the gift to her and to vary the trust.

HELD: 

The court found in favour of the trustee in bankruptcy, which meant that if Ms. Bolt reached her 45th birthday, her estate in bankruptcy would receive the remaining portion of the trust for distribution amongst her creditors. 

Ms. Bolt’s entitlement under the will was found to be “property” within the meaning of s. 2 of the Bankruptcy and Insolvency Act and through her bankruptcy vested with the trustee. 

The trustee in bankruptcy now stood in Ms. Bolt’s shoes and would have to wait until 2020 to see if the conditions of the will were met. 

The property under the will was found to not be exempt by the provisions within the Bankruptcy and Insolvency Act or the Court Order Enforcement Act.  To permit the trustee access to the inheritance would not jeopardize her sons’ futures.  

 POSITIONS OF THE PARTIES

The Trustee

[6]           Ms. Desmarais argues that Ms. Bolt’s benefits and entitlement under the will are clearly “property” within the meaning of s. 2 of the Bankruptcy and Insolvency Act[1] (the “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;

She submits further that s. 67(1) of the Act, which lists exempted property of the bankrupt, does not include benefits under a trust or will.  To this end she relies on Stoneman v. Farm Credit Corp.[2]:

The whole purpose and intent of bankruptcy legislation is to insure that all the property owned by the bankrupt or in which he may have a beneficial interest, with certain exceptions (set out in the Act) is vested in the trustee in bankruptcy.

[Emphasis added.]

[7]           Ms. Desmarais argues that the court in Re Koenne[3] took it as settled law that an interest in an estate is property of the bankrupt; at para. 12 the court observed:

3.  The definition of "property" in s. 2 includes an interest in the estate of a deceased person…

and concluded therefore that a life interest held by the bankrupt was property vesting with the trustee.  She also submits Re Hagerman[4] as a caution against permitting parties to “exit bankruptcy with sizable assets” (in that case an exempt home that he had acquired or built by transferring, pre-bankruptcy, non-exempt assets).

The Bankrupt – Ms. Bolt

[8]           Mr. Wolcott, for Ms. Bolt, argues that Ms. Bolt’s entitlement is not “contingent” within the meaning of the section, but that her receipt of the balance of the trust relies on “mere chance”.  He submits that the purpose of the Act is to protect this benefit; i.e. her entitlement under the will, from creditors.  Finally, he argues that to allow the application is to frustrate the intent of the gift to Ms. Bolt and to vary the trust.

[9]           Ms. Bolt was invited to speak, and she told me that she was extremely concerned that should the application be allowed it will “jeopardize her sons’ futures”.

ANALYSIS

[10]        It is surprising that neither Ms. Desmarais nor Mr. Wolcott could find, it seems, any cases directly on point.  It must be, sadly, relatively commonplace for bankrupts to be beneficiaries of trusts or bequests.  Nevertheless, I am persuaded that the trustee is correct in her interpretation and application of the Act.  Ms. Bolt’s entitlement under Vesta May Bolt’s will is clearly “property” within the meaning of s. 2 of the Act and upon Ms. Bolt’s bankruptcy vested with the trustee.  The trustee now stands exactly in Ms. Bolt’s shoes vis-a-vis the trust; i.e. the trustee (and, of course, the estate) must now wait until 2020 to see if the contingencies provided by the will actually evolve.  In other words, if Ms. Bolt reaches her 45th birthday her estate in bankruptcy will receive the remaining portion of the trust for distribution amongst her creditors.

[11]        The entitlement under the will is, as I say, property and is not exempted by the provisions of s. 67(1) nor is it exempted by reference by the provisions of the provincial Court Order Enforcement Act[5] ss. 71 et seq.

[12]        Mr. Wolcott’s interpretation of the terms and purposes, above, is incorrect.  The terms of the trust are, in law, the “contingencies” considered by s. 2.  The Act is not, somehow, devised to protect any of the bankrupt’s property from distribution, unless it is specifically exempted by the Act, and this entitlement clearly is not.  Finally, Ms. Bolt is incorrect.  To allow this application will not jeopardize her sons’ futures.  In fact (and in law) it will not change their position under the will whatsoever.  Should Ms. Bolt not survive to the age of 45 her trustee in bankruptcy will be held to the exact same terms of the trust; i.e. she will be obliged to pay the trust to Ms. Bolt’s children on the original terms of the will.

[13]        In the result the application is allowed.