By Vanessa Varga, Mellor Olsson Lawyers

Your client comes in with a handful of superannuation statements and credit card statements. "I need your help" he says. "My son died suddenly. He didn't own a house, just some money in super. He didn't roll over his super funds. Got a whole stash of statements here and he managed to rack up $50,000 debt on his credit cards. Hope I don't have to pay for it. Can you help me?"

Where do you start? A good place is the Bankruptcy Act 1996 (Cth) and the Life Insurance Act 1995 (Cth).

Pursuant to ss 249(6), (7) and (8) of the Bankruptcy Act, the following property is not divisible among the creditors of a bankrupt estate:

• property that -- if the deceased person had not died and a sequestration order had not been made against him or her immediately before his or her death -- would not have been divisible among his or her creditors (s 116 of the Bankruptcy Act 1996 (Cth)); 
• life insurance;
• superannuation; or
• payments from retirement savings accounts.

Section 205 of the Life Insurance Act provides that monies payable on the death of a person as a consequence of a policy effected on the person's life are not liable to be applied to pay the person's debts unless:

• the person has entered into a contract that provided expressly for the money to be so applied; or
• the person had charged the money with the payment of the debt; or
• the person gave an express direction, in his or her will or other testamentary document signed by the person, that the money be so applied.

None of the following constitutes an express direction:

• a mere direction that debts be paid;
• a charge of debts on the whole or a part of the person's estate; and
• the creation of a trust for the payment of debts.

Section 9 of Life Insurance Act defines what constitutes a "life policy" for the purposes of the Act. The term extends to a contract that constitutes an investment account contract which would include superannuation.

His Honour Stanley J considered the payment of debts in Cornford, Re [2015] SASC 15.

The deceased died intestate and was survived by his spouse and three children. The spouse was appointed administrator of the estate.

The deceased died leaving significant liabilities and, inter alia, superannuation. A number of superannuation funds paid the superannuation benefit to the estate and one superannuation fund paid the death benefit directly to one of the children in the exercise of the trustee's discretion.

The administrator retained a solicitor to advise in relation to the administration of the estate. The solicitor prepared a deed which purported to alter the distribution of the estate including directing superannuation benefits to the payment of estate liabilities.

Pursuant to s 69 of the Administration and Probate Act 1919 (SA), the administrator sought advice and directions from the court as to the distribution of the estate.

His Honour applied s 205 of the Life Insurance Act and confirmed that superannuation benefits paid to the estate of the deceased are "protected estate" and should not be applied to pay estate liabilities. In relation to the superannuation death benefit paid directly to the child of the deceased, his Honour confirmed that this amount did not form part of the estate of the deceased and was not available to pay estate liabilities.

So....

In a nutshell, what should you say to your client? Absolutely we can help you. You won't have to pay your son's credit card debts personally. If there aren't any other assets to pay the debts then creditors will remain unpaid. Your son's beneficiaries will receive all of his superannuation and the proceeds of any life policy. Win -- Win.

Note: Originally published in Retirement & Estate Planning Bulletin, July 2015, Volume 18 No 6