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Under ss 249(6), (7) and (8) of the Bankruptcy Act, this 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 money payable on the death of a person due to a policy made on the person’s life are not liable to be applied to pay the person’s debts unless:

  • the person has signed 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;
  • the creation of a trust for the payment of debts.

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

Be careful when giving instructions to your executor in your will to satisfy debts using life insurance or superannuation death benefits.

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