As a beneficiary has an equitable proprietary interest in trust property, the property does not form part of the trustee’s estate for the purposes of the bankruptcy and insolvency regimes. It therefore cannot be distributed to the trustee’s creditors. Thus a beneficiary enjoys ‘priority’ over the unsecured creditors of the trustee in the event of the latter’s bankruptcy or insolvency.
This can be illustrated by an example:
X owes B, C, D and E £50,000 each. B, C, D, and E are unsecured creditors of X. £100,000 is credited to X’s bank account. X is made bankrupt. Assuming X has no other creditors or assets, the claims of B, C, D and E abate rateably. Each will receive £25,000.
Vary the example: X owes B, C and D £50,000 each. B, C and D are unsecured creditors of X. X is a trustee of £50,000 for E. £100,000 is credited to X’s bank account: £50,000 of it is trust money. X is made bankrupt.
The trust money (£50,000) is not part of X’s estate for the purposes of the bankruptcy and cannot be distributed to X’s creditors. It continues to be held on trust for E. Assuming X has no other creditors or assets, B, C and D’s claims abate rateably. Each will receive £16,667.
A comparison of E’s position in the examples demonstrates the importance of a beneficiary’s equitable proprietary interest in the event of the trustee’s bankruptcy or insolvency.