When a beneficiary is bankrupt under the Bankruptcy Act 1966:
- Their inheritance (if they become entitled during bankruptcy) vests in their trustee in bankruptcy, not the individual
- That trustee is usually appointed by a body such as Australian Financial Security Authority
So you must pay the entitlement to the bankruptcy trustee, not the beneficiary.
2. Your key duty as Executor
As Executor, your role is to:
- Identify whether a beneficiary is bankrupt
- Locate and verify the trustee in bankruptcy
- Pay the inheritance to the correct party
If you do that correctly, you are protected.
3. When you can get into trouble
You may face personal liability if you:
- Pay the beneficiary directly after knowing they are bankrupt
- Ignore notice of bankruptcy
- Distribute the estate incorrectly
In that case, the bankruptcy trustee can:
- Demand the money from you
- Potentially take legal action to recover it
4. What if you don’t know they’re bankrupt?
If you had no notice and acted reasonably, you’re generally protected.
However, good practice is to:
- Ask beneficiaries to confirm bankruptcy status
- Conduct reasonable searches (e.g. bankruptcy register)
5. Timing matters
- If the beneficiary becomes bankrupt before receiving their inheritance → trustee gets it
- If they become bankrupt after receiving it → generally too late (it’s already theirs)
6. Special situations to watch
Discretionary trusts in Wills
If the will gives discretion (e.g. a testamentary trust):
- The beneficiary may not have a fixed entitlement
- This can sometimes protect assets from creditors (depends on drafting)
Life interests or staged distributions
- Each entitlement may be treated separately
- Bankruptcy can attach to future payments
Practical steps for you
- Ask the question early – confirm each beneficiary’s status
- Search if unsure (bankruptcy register)
- Do not distribute until you’re certain
- Get trustee details in writing
- Keep records of all steps taken
Bottom line
- You are not liable for the beneficiary’s debts
- But you are responsible for distributing correctly
- Pay the wrong person → you may have to pay twice
If you have been appointed the Executor of an estate and require assistance in applying for Probate and administering the estate contact our experienced team of Solicitors today on 4627 3333.
This article was published on 04/05/26 and the information is valid as at the date of publishing. This article is general in nature and is not and should not be considered or relied on as legal advice. Meehans Solicitors is not responsible in the event this information is relied upon by the reader in the absence of specific legal advice.
