Katerina Peiros, an Incapacity, Wills and Estates Lawyer and Accredited Specialist – Wills & Estates (Vic) at Hartwell Legal, discusses a case which shows how death benefits and life insurance can be protected from bankruptcy.
It is uncontentious that insurance proceeds on the life of the bankrupt or their spouse or de facto partner are protected from payment of debts of the bankrupt or of the bankrupt spouse or de facto partner. It is also uncontentious that superannuation of the bankrupt is protected from payment of debts of the bankrupt (whether alive or deceased).
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Logan J’s decision in Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) confirms that superannuation of a deceased is protected from payment of debts of the bankrupt spouse or de facto partner:
Debbie’s bankrupt husband, Michael, died leaving Debbie with two dependent children, shortly after Debbie went bankrupt. Michael had life insurance and superannuation.
Debbie’s bankruptcy trustee accepted that Debbie’s receipt of the life insurance was not available for payment of creditors, but pursued the superannuation on the ground that it was paid to Debbie as a result of the superfund trustees exercising their discretion to pay it to her as Michael’s dependent in the absence of death benefit nominations.
The bankruptcy trustee contended that the exercise of that discretion had the result of creating Debbie’s interest while she was a bankrupt and was therefore after acquired property for the purposes of the Bankruptcy Act 1966 (Cth) (“BA”), and not subject to the protection of section 116(2)(d)(iii)(A) and section 116(2)(d)(iv), which protect superannuation. Once the interest was created, it vested in Debbie’s bankruptcy trustee and became divisible amongst her creditors.
The bankruptcy trustee argued that the BA specifically refers to life insurance of the spouse or de facto partner being protected, this being deliberately different to the wording with respect to superannuation ‘the interest of the bankrupt in …’ superannuation, this distinction leading to the conclusion that only the Debbie’s own superannuation is protected from her creditors, not Michael’s.
Logan J acknowledged that until the exercise of superfund trustees’ discretion, Debbie had no rights towards the superannuation other than a right to be considered and of due administration. Accordingly, between Michael’s date of death and the date that the superfund trustees exercised their discretion to pay Debbie, Debbie had no interest within the meaning of section 116(2)(d)(iii)(A).
Upon the discretion’s exercise in her favour, Debbie’s interests in the superannuation was created, immediately captured by section 116(2)(d)(iii)(A) and therefore, immediately protected.
Logan J said Parliament intended for the protection of superannuation to apply to superannuation received by bankrupt spouses and bankrupt dependents. His conclusion is consistent with the result that if the three payouts had been paid to Michael’s bankrupt estate, they would have been protected under section 249 BA. Accordingly, superannuation champions as the asset protection strategy of our time.
Furthermore, a person who has met a condition of release and is facing bankruptcy should handle their superannuation with care, as a withdrawal from superannuation environment could expose it to the bankruptcy trustee and make it available for payment of creditors, whereas drawing a steady modest pension would not. But a bankrupt who has met a condition of release who withdraws their superannuation will not lose it to their bankruptcy trustee.
It is recommended representatives of estates take particular care to quarantine life insurance and superannuation benefits from the other estate assets to ensure they do not inadvertently use these funds to pay creditors. A Will clause to this effect is worthwhile.
And finally, there is nothing like a binding nomination! If Debbie had been named in a valid binding nomination, this case would have been unnecessary.
Endnotes:
1. Sections 204 and 205 of the Life Insurance Act 1995 (Cth)
2. Section 116(2) of Bankruptcy Act 1966 (Cth), provided there has not been any fraud or deliberate contributions to superannuation to avoid creditors
4. As it was a life insurance policy clearly falling within section 116(2)(d) of the Bankruptcy Act 1966 (Cth)
5. Section 58 Bankruptcy Act 1966 (Cth)
6. As per Sainsbury v Inland Revenue Commissioners [1970] Ch 712 at 725
7. Denlay v Commissioner of Taxation [2013] FCA 307
Contact Katerina Peiros at kpeiros@hartwell-legal.com.au
