Windfalls and inheritance in a trust deed

If you receive an inheritance, a lottery win or other new money or property during the first 4 years of a protected trust deed, it usually goes into the trust deed to pay your creditors. This is written into every trust deed by law. You must tell your trustee as soon as you know something is coming to you, and before you spend or move any of it.

What does the law say about windfalls?

The Bankruptcy (Scotland) Act 2016 sets out what every trust deed must say. Section 167 requires you to agree to pass to your trustee any estate you acquire during the 4 years beginning with the date you grant (sign) the trust deed, wherever it is. “Estate” means money, property and other things of value. Your trustee is the licensed insolvency practitioner who runs the trust deed and pays your creditors.

Three points are worth knowing:

• The 4 years count from the day you sign, not from the day the trust deed becomes protected.
• “Wherever it is” includes things outside Scotland, such as a share in a property abroad.
• The usual exclusions still apply. New estate is only passed over if it would have been included had you owned it on the day you signed. Most pensions, for example, are left out. See pensions and a trust deed.

What counts as a windfall?

Official sources give these examples:

• an inheritance, whether money, property or a share in something (AiB, mygov.scot and Citizens Advice Scotland all use this example)
• a lottery win or other prize (mygov.scot)
• compensation, such as a PPI refund (Citizens Advice Scotland)

Some other kinds of money are not windfalls in the same way, but you still need to tell your trustee about them:

Extra pay. AiB’s guidance says your income and costs should be reviewed at least once a year, and that if your income goes up, your contribution should normally go up in proportion.

Redundancy pay. AiB’s guidance for trustees says pay in lieu of notice is treated as income over the period it covers, statutory redundancy pay is looked at in the period you receive it, and the trustee has to check whether any part of a severance payment is passed to the trust deed.

Compensation you are expecting. If you have made, or are thinking about making, a claim for compensation, for example over mis-sold finance, tell the insolvency practitioner before you sign and your trustee during the trust deed, and ask how any payout would be treated.

What should I do if I am expecting money?

Tell your trustee as soon as you know, even if you do not yet know how much it will be or when it will arrive. AiB’s key facts document for trust deeds says that if you get extra money, like an inheritance, you must tell your trustee. mygov.scot says the same about windfalls such as a lottery win.

Then:

1. Do not spend, give away or move the money until you have spoken to your trustee.
2. Keep the paperwork, such as a letter from a solicitor dealing with an estate, or a prize notification.
3. Ask your trustee what happens next, including whether it changes your monthly payment or how long your trust deed lasts.

If you know before you sign that money is likely to come to you, for example because someone has died and left you something, tell the insolvency practitioner. It may change which option is right for you, and it is part of giving full information about your assets.

Could a windfall end my trust deed early?

It can, if it is big enough. A trust deed normally runs for 48 months. The law only lets the trustee set a shorter payment period where the money coming in, from income or anything else, would pay your debts in full, including interest up to the date you signed. AiB’s guidance adds that the costs of running the trust deed and statutory interest (interest that runs on the debts from the date you signed) should be covered too.

So there are two broad outcomes:

• A windfall that clears everything may allow your trustee to shorten the trust deed.
• A smaller windfall usually goes to your creditors as an extra payment, and your trust deed carries on as before.

Your trustee will explain which applies to you. See how long a trust deed lasts for the rules on the length of a trust deed.

What are the other options if I expect money soon?

If you already know money is coming, a trust deed may not be the right fit, and an adviser needs to look at your whole situation before anyone can say what might suit you. Other options include:

• The Debt Arrangement Scheme (DAS), where you repay your debts in full through a debt payment programme and interest, fees and charges are frozen.
• Sequestration (bankruptcy), where you are usually discharged after 12 months, although contributions from income can continue for 48 months.
• The Minimal Asset Process (MAP), for people with low income, few assets and debts of no more than £25,000.
• An informal arrangement with your creditors, which is not legally binding.

Free, impartial advice is available before you decide anything. See free debt advice in Scotland. For other changes, such as a new job or a drop in income, read if your circumstances change.

Official sources

• Bankruptcy (Scotland) Act 2016, section 167 (what a trust deed must state)
• AiB Notes for Guidance, protected trust deeds: section 2.13, Contributions (shorter periods and redundancy pay)
• AiB: Protected trust deed information document (key facts)
• mygov.scot: If your circumstances change during the trust deed
• Citizens Advice Scotland: Trust deeds in Scotland