How to protect an inheritance in the case of insolvency – trust your wills drafter to know the pitfalls

November 1st, 2024
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A testator may wish to provide in his last will and testament for the situation where a beneficiary is insolvent at the time of inheritance to prevent the inheritance from being included in the insolvent estate of the beneficiary.

The aim of such a clause is to prevent the creditors of the beneficiary from deriving any benefit from the estate of the testator. Although the merit and value of such a clause is obvious, one needs to exercise care with the wording.

What is included in an insolvent estate?

Section 20(2) of the Insolvency Act 24 of 1936, as amended, provides that the estate of an insolvent person shall include all property which he or she may acquire, or which may accrue during insolvency, subject to certain exceptions listed in s 23.

The legal position

‘In Mars: The Law of Insolvency in South Africa, (Ninth Edition, page 188), the author states: “A testator cannot prevent an inheritance from forming part of the insolvent estate of his heir by a provision in the Will that the bequest remain unenforceable during the period of sequestration. This can only be achieved by the testator if he has created a gift over. For example, the testator may include a provision in his Will stating that if the heir is an unrehabilitated insolvent at the time of the testator’s death, the bequest must accrue to another person, or the testator must allow the executors of the estate discretion to divert the inheritance to another person. In such cases the insolvent heir’s trustee will have no rights regarding that inheritance”’ (Theresa Tannous ‘What happens if my heir is insolvent?’ (www.millers.co.za, accessed 30-9-2024)).

What do our courts say?

In the case of Badenhorst v Bekker NO en Andere 1994 (2) SA 155 (N), a beneficiary, who was married in community of property, inherited assets from her late father after the joint estate of her and her husband had been sequestrated. The father had the following clause included in his will: ‘No rights and hopes of the beneficiaries under this will or part thereof shall be attachable by any creditor or vest in the beneficiary’s trustee on insolvency’ (AED Attorneys ‘What are the effects of putting an insolvency clause in your will?’ (https://adattorneys.co.za, accessed 30-9-2024)).

‘Notwithstanding [the] “insolvency protection clause”, the court dismissed the legal effect of the clause and held that the beneficiary’s inheritance formed part of her insolvent estate. The effect of the court’s judgment is that a direction in a will that a bequest shall not be liable to attachment at the instance of a beneficiary’s creditors, has no effect in law.

In the case of Vorster v Steyn [NO en Andere 1981 (2) SA 831 (O)], a father bequeathed his entire estate to his son, subject to the provision that if at the time of his death, his son happened to be insolvent, the proceeds of his estate should be placed in a trust until the time of the son’s rehabilitation.

The court held that the inheritance could not be placed beyond the reach of the son’s creditors. The provision in the father’s will was a naked prohibition (a nudum praeceptum) and the court accordingly interpreted the will so that the clause, seeking to protect the son’s inheritance, did not exist.

The court further ruled that the only way to protect the inheritance from creditors was to completely deprive the insolvent beneficiary from all interest in the testator’s estate. Because the beneficiary was not completely deprived of the interest, the inheritance vested in the insolvent estate of the son’ (‘Insolvent Beneficiary – Insolvency and Inheritance (in re: Estate Late Morton)’ (www.studocu.com, accessed 1-10-2024)).

Repudiation

‘If a testator has not made provision for an heir’s insolvency in their will, the heir’s only recourse to protect the inheritance is to repudiate it’ (AED Attorneys (op cit)). However, this action may have unintended consequences, as it can result in the other heirs receiving the inheritance that the testator did not intend for them to inherit (AED Attorneys (op cit)).

The principle

If ownership of property is bequeathed in terms of a will, it means that once the right of inheritance vests in a beneficiary, such inheritance will immediately form part of the beneficiary’s estate, irrespective of the beneficiary’s insolvency, unless provision has been made in the will for an alternative beneficiary to receive the inheritance.

David Meyerowitz, an eminent legal authority on wills and estates, opined that the so-called ‘insolvency protection clause’ found in wills has proved ineffective in law because the will’s drafter omits to provide for a gift-over on breach of the condition (ie, the insolvency of the heir).

What is the solution?

The inheritance bequeathed to a beneficiary can be protected from creditors if the testator gives a direction in his will, that in circumstances (where a beneficiary becomes insolvent prior to receiving his benefit), the beneficiary forfeits his or her benefit in favour of some third person or a class of persons (Tannous (op cit)).

Wim Visser BProc SARIPA Dip Insolvency law (UP) Cert Contracts and Commercial Litigation (LEAD) is a legal practitioner at Pather and Pather Attorneys Inc in Durban.

This article was first published in De Rebus in 2024 (November) DR 21.

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