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 3)

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

In Part 1 and Part 2 of this series I introduced you to a case where a beneficiary had an outstanding debt through an unpaid loan with her parents. When distribution of their estate occurred, the Trustee withheld a portion of her inheritance equal to the unpaid loan. In this last blog of the series, I will discuss the outcome of the case.

Interestingly the trial court found that a beneficiary of a Discretionary Trust does not have a property interest or a property right in non-distributed Trust principle or income before the Trustees have exercised their discretionary powers of distributions under the Trust meaning that the beneficiary does not have a property interest in the corpus until such time as the Trustee actually makes distributions.

Here, the terms of the Trust provided explicitly that until the death of the father’s spouse (the daughter’s mother), she was not entitled to any distribution from the Trust income or principle, therefore, the Trustee had the absolute discretion to make or withhold distributions to beneficiary and to offset the debt of the daughter to the Estate as being within the Trustee’s discretion.

Because the language of the Trust stated that it was the intention of the parent regarding the treatment of his/her children, that they share equally in the trust it would be a winfall for the daughter to have the benefit of discharging a debt owed to the father and still receive the same equal inheritance as her siblings, therefore, the daughter was deprived a portion of her inheritance equal to the discharged debt.

I think that this case is well reasoned and should stand in New Jersey.  A child who discharges a debt, treats the parent unfairly. They receive a windfall by discharging the debt while claiming an equal share of the proceeds of the Trust.   It is a lesson to be learned and serves as good instruction to Trustees.

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.