Court case provides clarity on bankruptcy protections
A recent court decision regarding the payment of a death benefit to a bankrupted beneficiary has important estate planning implications for SMSFs, warns an industry lawyer.
Christian Pakpahan from DBA Lawyers explained that a decision handed down by the Federal Court of Australia last year for the matter of Morris v Morris  FCA 846 clarified that broadly death benefit payments will be protected from creditors.
Mr Pakpahan said this is on the basis that “the payments were determined using the exercise of appropriate powers of superannuation fund trustees and that they are directly received by the bankrupt”.
However, what remained unclear after this case, he explained, is whether death benefit payments that were paid to the deceased estate and then from the estate to a bankrupted beneficiary would fall under the s116(2) exemption of the Bankruptcy Act?
This was clarified in a recent summary judgement that was handed down by the Federal Court of Australia for the matter of Cunningham v Gapes  FCA 787.
In this particular matter, Mr Pakpahan explained that the wife of the bankrupt received a distribution from the bankrupt’s deceased mother’s estate.
“The payment was made to the bankrupt but the wife received the money because the bankrupt did not have a bank account in his name. The distribution from the estate came from death benefit lump sum payments from the deceased mother’s superannuation fund,” he said.
“The trustee of the bankrupt’s estate argued that the payment did not fall under the s116(2) exemption contained in the Act because the bankrupt did not have an interest in the superannuation fund, rather it was the deceased mother’s estate that had the interest.”
In addition to this, they argued payment was not received from the fund, but rather it was received from the deceased mother’s estate.
“They argued that if it is accepted that it could pass through the deceased mother’s estate and still be considered a payment from the fund, then it would allow bankrupts to avoid property being made divisible to creditors simply by showing the source of their property was from a third-party’s superannuation fund, regardless of how many hands the funds passed through,” said Mr Pakpahan.
The court, he said, agreed with the trustee of the bankrupt’s estate and distinguished the matter from the case of Morris v Morris due to the fact that the benefits from the superannuation fund of the deceased were paid to the estate of the deceased prior to being distributed to the bankrupt.
“The court concluded that as a result it could not be said that the money represented an interest of the bankrupt in a superannuation fund,” said Mr Pakpahan.
“The bankrupt only received the funds because he was a residuary beneficiary under his mother’s will and not because the trustee of the superannuation fund ever exercised any discretion giving him a proprietary interest in the fund.”
Mr Pakpahan said this case clarifies that for the relevant s 116(2) exemptions to apply, the superannuation fund death benefit payments must come directly from the exercise of the appropriate powers of the superannuation fund trustees in favour of the bankrupt and the bankrupt must receive the payments directly from the superannuation fund.
Therefore, if a benefit passes to the deceased estate first, in most cases the benefit will become divisible among the creditors when it devolves to the bankrupt, he warned.
“It can be seen that, when it comes to bankruptcy, there are asset protection advantages in ensuring that death benefits go directly to the intended dependant,” he said.
“If one is aware of the bankruptcy or potential bankruptcy of a dependant, it would be wise to structure the succession plans so that the dependant receives lump sum death benefits directly from the superannuation fund, rather than having their portion go to the estate first and be dealt with by a will.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.