The #1 Thing You Must Have in Your Will to Protect Your Kids' Inheritance
It's an uncomfortable part of life to think about - the growing risk of future personal Bankruptcy — affecting one of your family members — a future beneficiary in your Will. In our an increasingly interconnected financial world, bankruptcy is often triggered by factors outside an individual's control. People in business can find themselves caught up in a surprise sequence of falling dominoes that simple overwhelmed them and bankruptcy is the only commercial way out.
And while this is not something you expect for a family member, it's certainly something you can plan for, just in case, so a surprise bankruptcy does not erode their future inheritance.
Read in this article
- Insolvency and Bankruptcy — different stops on the same road
- Rising insolvency rates in Australia are being driven by a combination of factors
- Beneficiary Bankrupt? How a Protective Will Secures an Inheritance
- Why is this needed?
- So how is an Inheritance is Treated?
- Creditors can take your Inheritance
- Don't let Bankruptcy erode your Legacy. Build a Protective Will today
- Here’s how that works:
- Why this works
- Where to from here?
- FAQ's
- So, what exactly is a Bankruptcy Trust in simple terms?
- How does this trust actually stop creditors from taking the inheritance?
- Is this something that only works for the super-wealthy?
- Can you set one of these trusts up after someone has already gone bankrupt?
- What’s the main takeaway for modern estate planning?
- Sources & Further Reading
Insolvency and Bankruptcy — different stops on the same road
While insolvency and bankruptcy are different, though they are closely related concepts. In essence, insolvency is a financial state, while bankruptcy is a legal process that often follows insolvency. Both mean that your unable to pay your debts as they become due.
Rising insolvency rates in Australia are being driven by a combination of factors
- Rising Interest Rates
- Growing Cost-of-Living Pressures
- Challenging Business Conditions
- Industry-Specific Challenges: Construction companies are grappling with soaring material costs and labour shortages, while the hospitality industry is contending with reduced discretionary spending.
Personal Bankruptcy by the Numbers
- By the end of 2024, 11,643 people entered personal insolvency. To put this into perspective, with an adult population of approximately 21 million, the chance of an individual becoming insolvent in that year was roughly 1 in every 1,800 adults.
Business Bankruptcy by the Numbers
- When considering the approximately 2.6 million actively trading businesses in Australia, the chance of a business becoming insolvent in the 2023-24 financial year was about 1 in every 235 businesses.
Is it any wonder that bankruptcy, and personal insolvency are now very real risks to future inheritances?
So how do you plan a future where you protect a potential beneficiary of an inheritance from a bankruptcy claim? You're about to enter the realm of the Bankruptcy Trust in a Protective Will. Thankfully, there is a Bankruptcy Trust included in every Protective Will document you can purchase through Sapience Financial.
Thank goodness you have found Sapience.
Beneficiary Bankrupt? How a Protective Will Secures an Inheritance
Adding a Bankruptcy Trusts in a Protective Will protects inheritances; especially for spouses, children, and other beneficiaries. They ensure assets remain secure against bankruptcy, activating if a beneficiary becomes bankrupt before or after the benefactor’s death. This prevents inherited assets from falling into creditors’ hands.
Why is this needed?
To understand what you're facing you need to understand some of the legal rules around bankruptcy.
Section 58 of the The Bankruptcy Act 1966, treats any inherited assets as ‘after-acquired property.’ Creditors can claim these unless a trust protects them.
- The key phrase here is ‘after-acquired property,’ so let's learn more.
So how is an Inheritance is Treated?
If you are bankrupt and, during that period, a relative passes away and leaves you an inheritance (money, a business, a house, a car, etc.), you do not get to keep it.
Under Section 58:
- The inheritance is legally defined as 'after-acquired property.'
- As soon as you become entitled to it, it automatically vests in (ie: becomes the legal property of) your Bankruptcy Trustee.
- You are legally required to inform your Trustee about the inheritance.
- The Trustee will then take control of the inherited asset(s), sell them if necessary, and distribute the proceeds to your creditors. If there is any money left over after all debts and the Trustee's fees are paid, that surplus will be returned to you.
Creditors can take your Inheritance
Let's Make This Real: A Scenario.
David becomes bankrupt on July 1, 2024. His bankruptcy is scheduled to end on July 2, 2027.
- The issue: In May 2026, his grandmother passes away and her post office Will Kit post office Will Kit states, "I leave my house to my grandson, David."
The Outcome: Even though David is two years into his bankruptcy, he doesn't get the house. He must immediately tell his Trustee. - The Bankruptcy Trustee will take legal ownership of the house, sell it, and use the funds to pay the people David owed money to.
Don't let Bankruptcy erode your Legacy. Build a Protective Will today
A person making a Protectiove Will (the testator) can anticipate their beneficiary(s) might be at risk of bankruptcy in the future. To protect the inheritance from creditors, instead of leaving the asset directly to the beneficiary, they leave it to a Protective Trust already embedded and ready to be activated if needed, in a Protective Will document.
Here’s how that works:
- The Will: The Will doesn't state 'I leave my house to David.' Instead, it says something like, 'I leave my house to be held in a trust, for the benefit of David.'
- The Trust: This creates a separate legal entity (the trust). The house is owned by the trust, not by David directly.
- The Trustee of the Will: The Will names a trustee (e.g., David's sister, a lawyer) who controls the trust assets according to the rules set out in the Will document. They might allow David to live in the house or receive rental income from it.
Why this works
Because David does not legally own the asset, his Bankruptcy Trustee cannot claim it as after-acquired property. The house belongs to the trust. This strategy effectively shields the core inheritance from being sold to pay David's creditors.
Where to from here?
A Bankruptcy Trust can help protect an inheritance from an unknown future but you have to build a Protective Will today, before you need it tomorrow.
Embedding a Bankruptcy Trust in a Protective Will document secures inheritances against bankruptcy risks. This is especially important for small business owners, professionals (eg. doctors, lawyers), and wealthy individuals gain from these trusts. They keep assets safe within the family from external threats as Executors, distribute assets within these trusts and they can adjust protection and distributions, based on each beneficiary’s situation.
Thankfully, Sapience Financial can help you out with that. Let's have a quiet chat about what you need.
FAQ's
Your Inheritance Protection Questions, Answered. Here’s a quick summary of what you need to know about using a Bankruptcy Trust to protect your loved ones' inheritance.
So, what exactly is a Bankruptcy Trust in simple terms?
Think of it as a safety net built into your Will. Instead of leaving an inheritance directly to a beneficiary (where it could be snapped up by creditors if they're in financial strife), the assets are placed into a special-purpose trust. Your beneficiary can still use and benefit from the inheritance, but they don't technically own it, which keeps it out of the hands of their bankruptcy trustee.
How does this trust actually stop creditors from taking the inheritance?
It all comes down to ownership. Under Australian bankruptcy law, any "after-acquired property" (like an inheritance received during bankruptcy) can be seized. However, because the inheritance goes into the trust and not to the beneficiary directly, it never becomes their legal property. The trust owns it. This simple, but powerful, legal step means the inheritance is shielded and can’t be classified as property that creditors can claim.
Is this something that only works for the super-wealthy?
Not at all. While it’s certainly a valuable tool for wealthy families, with the rise in insolvencies, it's becoming increasingly relevant for many folks. Small business owners, directors, or any professional who carries a higher personal financial risk could have a beneficiary who finds themselves in a tough spot. It’s a protective measure for anyone who wants to ensure their gift is a blessing, not a burden.
Can you set one of these trusts up after someone has already gone bankrupt?
Unfortunately, no. This is the crucial point. A Protective Will containing a Bankruptcy Trust is a proactive measure, not a reactive one. It must be put in place by the will-maker before it’s needed. Think of it like insurance; you can't buy it after the house has already caught fire.
What’s the main takeaway for modern estate planning?
The key message is with rising financial uncertainty, simply leaving a direct inheritance carries risks you might not have considered. A Protective Will with a Bankruptcy Trust is a powerful and legitimate way to make sure the inheritance you leave behind truly benefits your loved ones, protecting them from potential financial disasters down the road.
Sources & Further Reading
- Bankruptcy Act 1966 (Cth) s 58 - The primary legislation governing how property, including inheritances, is treated upon bankruptcy.
- Treatment of property in bankruptcy - Official guidance from the Australian Financial Security Authority (AFSA), the government regulator.
- Testamentary trusts - A government overview of what testamentary trusts are and how they function as an estate planning tool.
Call us today on 1300 137 403 or email us here for a no-obligation private chat about your situation.
Drew Browne is a specialty Financial Risk Advisor working with Small Business Owners & their Families, Dual Income Professional Couples, and diverse families. He's an award-winning writer, speaker, financial adviser and business strategy mentor. His business Sapience Financial Group is committed to using business solutions for good in the community. In 2015 he was certified as a B Corp., and in 2017 was recognised in the inaugural Australian National Businesses of Tomorrow Awards. Today he advises Small Business Owners and their families, on how to protect themselves, from their businesses. He writes for successful Small Business Owners and Industry publications. You can read his Modern Small Business Leadership Blog here. You can connect with him on LinkedIn. Any information provided is general advice only and we have not considered your personal circumstances. Before making any decision on the basis of this advice you should consider if the advice is appropriate for you based on your particular circumstance.
