Which case won?

casea
The case for the bankrupt’s wife
  • The grant of probate of my mother-in-law’s estate separately identifies funds in the amount of $248,696.49 held by her in a regulated superannuation fund.
  • The funds were received by solicitors for the estate, not intermingled with any other funds, and were distributed separately to the beneficiaries of my mother-in-law’s will in March 2014.
  • The fact that the payment was made through the solicitor and the estate does not alter the nature of the payment as being made directly and solely from a regulated superannuation fund.
  • I received the money at a time when I was unaware that my husband’s bankruptcy had been extended and the money has since been spent. It would be unfair to make me repay the money.
caseb
The case for the trustee in bankruptcy
  • The bankrupt did not have an interest in the relevant superannuation policy, his mother did.
  • The payment to the bankrupt’s wife was not from a regulated superannuation fund, it was a distribution from the estate of the bankrupt’s mother under the terms of her will. If it had been made direct from the fund there would be evidence to support this, but none has been provided. Indeed, it’s clear the money passed through several hands.
  • The bankrupt was a residuary beneficiary under his mother’s will – that is, he was only entitled to all or part of the remainder of an estate after all the specific gifts had been given. That means he had no proprietary interest in any of the specific assets of his mother’s estate, he merely had a right to ensure that the executors or administrators of his mother’s estate completed their duties.
  • The funds should be repaid and divided amongst the bankrupt’s creditors in the usual way.

So, which case won?

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a47%
b53%

Expert commentary on the court's decision

“When planning the distribution of your estate, it would be prudent to make a binding death benefit nomination in favour of beneficiaries who are bankrupt or prone to undertaking risky financial activities and draft your will with a greater distribution to other beneficiaries to compensate for this.”
Court finds in favour of trustee in bankruptcy

In the case Cunningham (Trustee) v Gapes, in the matter of Gapes (Bankrupt) [2017] FCA 787, the court found in favour of the trustee in bankruptcy, Mr Cunningham.

Section 116(2)(d) of the Bankruptcy Act 1966 (Cth) excludes payments from regulated superannuation funds received after the date of bankruptcy from property divisible amongst creditors. However, the court rejected the argument put forward by the bankrupt’s wife, Ms Gapes, that the money she had received from her mother-in-law’s superannuation fund met the criteria to be classified as property which is excluded from the pool to be divided among creditors.

It was not in dispute that the superannuation fund paid no money directly to the bankrupt or the bankrupt’s wife. The money was paid from the superannuation fund to the estate and then paid to Ms Gapes. Although the money derived from a regulated superannuation fund, it did not bear that character at the time it was paid to Mr Gapes.

Bankrupt found to have no interest in superannuation fund

Also, the interest in the superannuation fund was that of Mr Gapes’ mother, not of Mr Gapes himself. Accordingly, as Mr Gapes had no interest in the superannuation fund and the money was paid to him from his mother’s estate and not from the superannuation fund, the court ordered that the trustee was entitled to summary judgment and that the money was property divisible amongst creditors.

The court agreed with the trustee’s assertion that Cunningham v Gapes could be distinguished from the case of Trustees of the Property of Morris (Bankrupt) v Morris (Bankrupt) [2016] FCA 846 because Ms Morris, being a dependent of the deceased (her late husband), was paid the benefits directly upon the favourable exercise of the discretion of the trustees of the two superannuation funds.

Leaving money to beneficiaries who are bankrupt or prone to taking financial risks

The case brings to light two important practical points.

First, ensure that you have a binding death benefit nomination in place for your superannuation fund if a beneficiary is a bankrupt or is prone to undertaking risky financial activities, rather than allowing your superannuation to become part of your estate and potentially available to creditors in bankruptcy.

Secondly, when planning the distribution of your estate, it would be prudent to make a binding death benefit nomination in favour of beneficiaries who are bankrupt or prone to undertaking risky financial activities and draft your will with a greater distribution to other beneficiaries to compensate for this.

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