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 2)

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

In Part 1 of this series I introduced you to a recent case where a Trustee withheld distributions from a beneficiary in the amount equal to an unpaid loan discharged in bankruptcy. In Part 2 I will dive deeper into the details of this case.

In this case the Court found that notwithstanding the bankruptcy, there was no reason why the Trustee’s discretion could not be used to withhold the Trust beneficiary’s share of the inheritance because of their failure to repay the debt owed to their parent(s) while alive.   The facts were such that the parent signed a note for $50,000.00 to a bank for the benefit of his daughter and her husband.  No payments were ever made on the Note.   In his Will, the parent left the entirety of the Estate to a Trust for the benefit of his spouse and their children including the daughter.  Thereafter, the spouse died and the bank collected from his Estate on the Note that he had signed for the daughter.   The daughter, however, petitioned for bankruptcy and her debt to her father was discharged.   In response, the Trustee took the amount of the unpaid loan and calculated the interest that should have been paid over the loan during the term in which the balance remained unpaid to the bank.  He withheld the daughter’s share of the Trust equal to that sum but made distributions to everyone else.  The daughter obviously thought that this was unfair and sued the Trustee claiming that under State and Federal Law, her Discharge in bankruptcy precluded the Trustee from offsetting her share of distributions against her prior debt to her father’s Estate.

In my next blog I’ll discuss the outcome of this case.

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.