If you have declared bankruptcy, a timely inheritance may not be available to assist your financial recovery. A bankruptcy, whether voluntary or involuntary, is meant to provide individuals with a fresh start in the form of a release from most debts. In return, an individual relinquishes all capacity to dispose of or deal with their property which vests immediately in a trustee in bankruptcy. Property, by this definition, includes any property existing at the time of bankruptcy or future acquired property, or any property passing to the individual before they have received a discharge in bankruptcy. 

In Richards (Re), 2022 ONCA 216, the Royal Bank of Canada held an outstanding judgment against Richards for $987,000, together with costs and interest, and decided to enforce its rights by stepping into the shoes of the trustee in bankruptcy to pursue a claim against the trust funds to which Richards was entitled. The trust fund, received by Richards from his parents’ estate, was created when his mother passed away subsequent to Richards’ bankruptcy, but prior to his discharge in bankruptcy. 

Richards appealed the decision at first instance, on the basis that the wording of the trust instrument provided the trustees of the Trust Fund with a non-payment mechanism in the event of bankruptcy of any beneficiary entitled under the trust, and that this non-payment clause overrode a more general clause that stipulated mandatory payment of trust monies at the Time of Division, which time was triggered by the death of his second parent. The non-payment clause provided as follows: 

Any right of a Beneficiary to receive any income or capital of the Trust Fund as a result of a mandatory direction to the Trustees to make such a distribution … shall be enforceable only until such Beneficiary shall become bankrupt … whereupon and so long as the effect or operation thereof shall continue, the Beneficiary’s Interest shall cease until the cause of the Beneficiary’s Interest becoming vested in or belonging to or being payable to a person other than such Beneficiary shall have ceased to exist … and then the Beneficiary’s Interest shall again be allocated to such Beneficiary as aforesaid unless and until a like or similar event shall happen whereupon the Beneficiary’s Interest of such Beneficiary shall again cease and so on from time to time. 

The Court of Appeal disagreed as a matter of interpretation that the mandatory payment clause was unenforceable in the event of bankruptcy. The Court went on to find that, if the trust instrument had provided for a mechanism to prevent the payment to a beneficiary in the event of bankruptcy, such a mechanism would offend the public policy that underlies the Bankruptcy and Insolvency Act, RSC 1985, c.B-3 (BIA), by allowing persons to place assets out of the reach of their creditors.  

Parents wanting to help their families through estate planning may want to keep in mind the policy implications of the BIA when arranging their affairs, and consult with financial planners and tax experts to consider the availability of other financial mechanisms to achieve their goals. 

Thank you for reading. 

Ian Hull and Susanne Myers