What are the effects of putting an insolvency clause in your will?

insolvency

Insolvency has become a sobering reality for a lot of people. The most recent statistics from Statistics South Africa showed that insolvencies increased by 123% in the three months ended August 2021 compared to the same time in 2020. Facing insolvency isn’t always because you made poor financial decisions. The global pandemic taught us many things, including the fact that we can make the best decisions and circumstances can change our reality in ways we never thought of.

When you set up your will, you might want to protect your deceased estate from the possibility of a named beneficiary being insolvent at the time that his/her inheritance becomes due and then being used to pay creditors.  Under South African law, however, there are limited ways in which you can do this, and testators need to be very careful with the specifics in their wills.

Quick recap on insolvency

In his personal capacity, an individual is insolvent when they cannot pay their debts as they become due. You could reach an agreement with your creditors to pay your debt without the intervention of third parties, or you could be sequestrated. In the case of sequestration, the insolvent’s estate is placed under sequestration and a trustee takes control of it. Assets will be sold off or arrangements made to pay the creditors at least a portion of what is owed them.

A testator could wish to keep his own deceased estate from becoming part of the insolvent estate of a beneficiary and be sold off to pay debts. In this case, an insolvency clause needs to be added to the will.

The insolvency clause

In South African case law, there are various examples of Insolvency clauses being dismissed or the Will being interpreted as if the clause did not exist. For example, in Badenhorst v Bekker N.O. & Others 1994 (2) SA 155 (N) the insolvency clause in the Will read “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”. The clause had no effect on the law and the inherited estate formed part of the beneficiary’s insolvent estate.

The issue arises from the fact that the inheritance, once received, will immediately form part of the beneficiary’s estate, regardless of his/her financial situation. The testator cannot place restrictions on how that inheritance is to be used, or not used as the case may be.

So, what CAN you do?

If a testator does want to add an insolvency clause that has an effect and protects the deceased estate, it is possible. These solutions, though, usually equate to the intended beneficiary no longer receiving his/her inheritance as originally intended.

Solution 1:

The Will can state that, should the intended beneficiary be insolvent when he/she is to receive the inheritance, they will forfeit it and the deceased estate’s executor will award the benefit to the beneficiary’s heirs. In the absence of heirs, the insolvent beneficiary’s inheritance can be forfeited to the other named beneficiaries in the Will.

Solution 2:

The testator can instruct that a discretionary trust be created should the beneficiary be insolvent. In this case, the inheritance will be owned by the trust and not the insolvent beneficiary. It is, therefore, not part of the beneficiary’s estate and cannot be subject to a creditor’s claim.

Section 3:

A real right can be created that would favour the beneficiary but not have him/her inherit directly. A real right could be a fideicommissum where a property is given to an heir on the condition that this heir will pass it on to a specific person at a later date. A real right could also be a usufruct over the bequeathed property in which case the right to use and derive income from a property is temporarily granted to an individual.

At AED, we know how important it is to ensure your wishes are respected once you are gone. We can help you ensure that this happens by carefully drafting a Will that will be respected under South African law.

AED Attorneys understands that every situation is unique, and although they strive to ensure that the information contained herein is accurate at the time of publishing, it cannot be guaranteed to be without errors or omissions. As a result, AED Attorneys, its employees, independent contractors, associates or third parties will under no circumstances accept liability or be held liable for any innocent or negligent actions or omissions in this article, which may result in any harm or liability flowing from the use of or the inability to use the information provided.

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