Bankruptcy Issues Related to Lifetime Gifts

When making lifetime gifts, it is important to be aware of potential bankruptcy issues that may arise, especially if the person making the gift is or becomes bankrupt. Here are the key points to consider:

1. Effect on Estate After Death: If you make gifts during your lifetime that lower the value of your estate, there might be less money available to pay your creditors after you pass away. If your estate has been reduced because of these gifts, the trustees may need to look into whether any of these gifts can be reversed to help pay off the debts of the estate.
2. Challenge of Gifts in Bankruptcy: If you make a gift during your lifetime and later become bankrupt, that gift could be scrutinised by a trustee in bankruptcy. The trustee has the authority to recover assets to satisfy debts owed to creditors, and therefore can challenge the gift.
3. Transactions at an Undervalue: A gift can be seen as a “transaction at an undervalue,” meaning that the recipient received something valuable for less than its worth, or for nothing at all. Under the Insolvency Act 1986, if you make a gift or sell something for less than its value within five years before bankruptcy, a trustee can apply to the court to set the transaction aside.
4. Preference to Certain Creditors: If you prefer one creditor over others by making a gift to them (such as transferring assets to pay off a friend instead of another creditor), this could be seen as giving “preference.” The trustee in bankruptcy can seek to reverse such a transaction.
5. Timing of Gifts: If you make a gift within two years of becoming bankrupt, it is automatically presumed that you were insolvent at the time of the gift. Between two and five years before bankruptcy, the trustee may still challenge the gift, but only if they can prove that you were insolvent at the time of making it.
6. Effect on Joint Property: In certain circumstances, joint property can be used to settle the debts of an insolvent estate. If you are considering making a gift that could significantly reduce the value of your estate, please be aware that any jointly owned property may also be impacted.

This is only intended to be a summary and not specific legal advice.

Olga Kyriakoudi is a Trainee Solicitor currently in our Private Client team.  If you would like further information or advice, please contact her or another member of our Tax, Trusts, Wills & Probate team.