Today we address the issue of what happens if an individual declares bankruptcy and is a beneficiary of a trust. The answer to this question will depend on the type of trust in question.

Should it be a discretionary trust, the trustee will typically choose to forgo distributing any amounts to the bankrupt beneficiary for the duration of their bankruptcy, which is generally three years.

Conversely, if the trust is a unit trust, any distributions made in relation to the bankruptcy unit must be distributed in proportion to the units.

Additionally, it is important to take note of the trust’s financial statement accounts and balance sheet: if there is an amount due and payable to the bankrupt individual, their bankruptcy trustee may ask the trustee of the trust to pay that amount to the bankrupt estate. This is a frequent occurrence in the case of smaller and family trusts.