How Bankruptcy Impacts Estate Planning

When preparing a Will or Power of Attorney you need to make sure that the person(s) chosen to handle the affairs of the estate can get the job done. Skills, reliability and trustworthiness are primary considerations.  Whether someone is or may be at risk of becoming bankrupt is another factor to consider.

Appointment of Bankrupt as Executor:

Section 9 of Manitoba’s The Trustee Act states that a court may remove a person who is (among other things) bankrupt. Under the Bankruptcy and Insolvency Act a person who becomes bankrupt gives up full control over all of their property to the trustee in bankruptcy.  Where a bankrupt person is both the executor and a beneficiary of the estate trustees in bankruptcy sometime seek to have them removed as executor, because of fears that they will not do a proper job of administering the estate.  In a case out of the British Columbia Supreme Court (titled “Gechman”) this was done, in part because of fears that the bankrupt executor was not dealing with things honestly and in good faith.

The primary consideration when considering removal of an appointed executor is what is best for the beneficiaries of the estate. Bankruptcy is a factor that is considered.

An undischarged bankrupt can be an executor of a will, but it complicates the process. In most cases it is likely best to choose an executor who is not facing bankruptcy.

Bankrupt Beneficiaries

Consider also, that the law is clear that a person who has not been discharged from a bankruptcy gives up all of their property rights to the trustee in bankruptcy. That includes the right to inherit property.  If a beneficiary named in a will is bankrupt that person’s share of the estate will vest in the bankruptcy trustee, to be distributed among the creditors.

Anyone who has a beneficiary named in their will who is facing bankruptcy should seriously consider changing their will.

Bankruptcy and Power of Attorney:

In contrast to an executor of a will, Manitoba’s The Powers of Attorney Act flat out prohibits a person who is an undischarged bankrupt from acting as a Power of Attorney. Once they have been discharged from their bankruptcy they can then be appointed as a Power of Attorney for an estate. Having a bankruptcy in your past does not prevent you from becoming a power of attorney, but being an undischarged bankrupt does.

The Powers of Attorney Act expressly says that a power of attorney terminates if the “donor”, the person who made the power of attorney, becomes bankrupt, unless the enduring power of attorney says otherwise. Not all powers of attorney state that it will not terminate if the donor becomes bankrupt.

For all estate planning matters a bankruptcy can have consequences, and one should carefully consider the impact if that situation comes up.