Safeguarding Inherited Assets in the Face of Insolvency

In today’s world, the spectre of insolvency looms over many individuals, especially after the blow that Covid-19 has brought down on South Africans. As such, it’s increasingly important to consider how your hard-earned assets will be protected in the event that your heirs face financial turmoil. 

What if one of your heirs, the intended recipient of your generosity, finds themselves declared insolvent or bankrupt? Can you protect the inheritance you intended for them from being claimed by their creditors?

The Role of Insolvency Clauses

The answer lies in the inclusion of insolvency clauses in your Will. These clauses play a pivotal role in determining the fate of inherited assets when an heir faces financial distress. But it’s important to note that drafting an effective insolvency clause isn’t straightforward; it requires careful consideration and precision.

What the Law Says

In South Africa, the law governing this matter is clear. As stated in “Mars: The Law of Insolvency in South Africa” (Ninth Edition, page 188), a testator cannot prevent an inheritance from forming part of the insolvent estate of their heir by merely stipulating that the bequest remains unenforceable during the period of sequestration.

To safeguard the inheritance effectively, the testator must create a “gift over” provision in their Will. For instance, the Will can specify that if the heir is declared an unrehabilitated insolvent at the time of the testator’s death, the bequest must be redirected to another person. 

Alternatively, the testator may grant the executors of the estate the discretion to divert the inheritance to a different beneficiary. In such cases, the insolvent heir will have no claim to the inheritance.

The Power of 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 before it vests in their estate. However, this action may have unintended consequences, as it can result in the heir or residue heirs receiving specific assets or money that the testator did not necessarily intend for them to inherit.

The Importance of Inclusion

To ensure that your wishes and intentions are upheld during the administration of your estate, it is of paramount importance to include an insolvency clause in your Will. By doing so, you can proactively protect your assets and inheritance from the reach of creditors in case one of your beneficiaries faces financial hardship.

In conclusion, while insolvency can cast a shadow over even the best-laid estate plans, it’s crucial to remember that you have the power to protect your assets and ensure your intentions are respected. By including a carefully crafted insolvency clause in your Will, you can provide a safety net for your heirs and beneficiaries, shielding their inheritances from the clutches of financial adversity.