Survivorship clauses (or special destination clauses) are conditions that commonly appear in the title of property held by two or more people, usually spouses. They are generally worded " the property is disponed to X and Y, equally between them, and to the survivor (or survivors) of them".
The effect of such clauses is that when one party dies their interest automatically transfers to the survivor on the party's death. Unless both parties agree that the clause should no longer apply and "evacuate" the condition, it cannot be contracted out of by either party unilaterally. Consequently even if one party executed a will leaving their interest to a third party, such a term would be ineffective and the property would still transfer to the survivor on death.
Advice is often sought by trustees and debtors as to what effect a survivorship clause has if one of the owners of the property becomes bankrupt and then dies or, his/her spouse dies. The position depends on whether it is the debtor or the spouse who dies and when.
Death of the debtor
As a result of sequestration, the debtor's interest in any title to property will vest in the trustee. The trustee can accordingly seek to dispose of the debtor's share of the title. What however is the trustee's position if the debtor dies post sequestration before the trustee has realised the debtor's interest?
In the case of Fleming's Trustee v Fleming, the permanent trustee on the sequestrated estate of a debtor who died post discharge of his sequestration raised an action against the widow of the debtor. He sought declarator that he remained vested in the debtor's one half share of the property, or, alternatively, if the court held that the one half share of the debtor transferred to the debtor's widow as a result of the survivorship destination, that she was personally liable to the debtor's creditors to the extent of the value of that one half share. The Court of Session held that as the Trustee had not taken title to the debtor's interest in the property the survivorship destination took effect on the debtor's death with the result that the debtor's interest in the property transferred to the widow and did not remain vested in the Trustee. Consequently the debtor's interest in the property was lost to the sequestrated estate.
All was not lost for the trustee, however, as the court went on to find that although the widow received title to the debtor's share the property she did so with it being burdened with the debtor's debts. Consequently, she incurred a personal obligation to pay the debtor's debts to the extent of the value of the property that she received.
It should be noted that the outcome of this action would have been different had the trustee taken title to the property prior to death of the debtor (i.e registered a Notice of title). In that event the trustee would convert the personal right to the property conferred on him by the Act and Warrant/Award of Sequestration into a real right. That would be sufficient to defeat the personal right conferred on the widow by the survivorship destination and prevent it operating. In effect the trustee would have won the "race to the register".
It is not necessary in all cases that a trustee takes title to a property since it is uncommon for debtors to die before the trustee has realised a property. However in cases where a debtor is elderly or in very poor health it is a step worth considering. Although the trustee can sue the surviving spouse in cases where title has not been taken this is a potentially a less satisfactory position that actually retaining title to the property itself. We have dealt with cases where the spouse has attempted to sell the house and we have had to apply to the court for an inhibition to preserve the asset pending decree being granted against the spouse for payment.
Death of a debtor's spouse
What then happens when there is a survivorship destination and the debtor's spouse dies?
Section 32 of the Bankruptcy (Scotland) Act 1985 regarding vesting applies. In particular, Section 32(5) provides that "any non- vested contingent interest which the debtor has shall vest in the trustee as if an assignation of that interest has been executed by the debtor and intimation thereof made at the date of sequestration". The debtor's right to receive his or her spouse's interest in the property constitutes a "non vested contingent interest" and therefore would vest in his or her trustee.
The result in most cases therefore is that the trustee will become vest in the whole property and not just the debtor's share. What is important to remember however is that vesting will not be affected by any will left by the predeceasing spouse. Thus even if the spouse left a will leaving her interest to the parties' children that would not be enough to defeat the survivorship destination and therefore title would still pass to the trustee.
Where the debtor was sequestrated post April 2008 certain time limits apply to this provision. Section 32 (5A) provides that " Any non-vested contingent interest vested in the Trustee by virtue of Subsection (5) shall, where it remains so vested in the trustee on the date on which the debtor's discharge becomes effective, be reinvested in the debtor...". Consequently in a post April 2008 case if the spouse dies post discharge the spouse's interest will vest in the debtor and will not form part of his sequestrated estate. As a consequence a trustee might find himself in the strange position of holding the property jointly with the debtor himself.
Section 32(5A) does not however apply to pre April 2008 cases and, consequently, in such older cases the spouse's interest will vest in the trustee even if he or she dies after the date of discharge.
Given the above, we would always advise that, where there are uncertainties about entitlement to deal with a share of a property which the debtor had an interest, legal advice is sought particularly if there are, for example, uncertainties as to who is entitled to free proceeds from any sale which might take place after the death of a debtor or his/her spouse.