Can a Beneficiary Who Discharges A Debt Owed to His Parent In Bankruptcy Be Deprived of A Portion of His Inheritance By the Executor (Part 1)

By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold, NJ Estate Attorney

Parents and family members often make loans to their children and to others whom they feel a close relationship.   What happens if the child defaults on their debt and then files for bankruptcy? Can the Executor or Trustee of their parent(s), family member(s) estate, deduct a sum equal to the unpaid debt from the beneficiary’s share of the inheritance?

The answer may surprise you.   In a recent case, a Trustee withheld distributions from a beneficiary equal to the unpaid loan while distributing to all other siblings equally under the Will. In essence the trustee setoff the child’s debt to the parent’s Estate from her inheritance.   Because the child’s debt to the Estate had been discharged in bankruptcy, the issue was whether the trial court could compel the Executor/Trustee to make the distribution to the child.  The terms of the Trust gave the Executor/Trustee absolute discretion over distributions to beneficiaries.

In my next blog I’ll discuss the case further.

To discuss your NJ Estate matter, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at  Please ask us about our video conferencing consultations if you are unable to come to our office.