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Drawdown path key to bankruptcy protection

SMSF drawdown bankruptcy

The drawdown method used by an individual can influence the effectiveness of an SMSF as an asset protection vehicle in the event of member’s bankruptcy.

An SMSF is a good asset protection vehicle for times when a fund member has or is about to declare bankruptcy, but advisers and trustees must be mindful of the effect methods of drawdown individuals use can have in these circumstances, a leading strategist has said.

“Any monies coming out of [the SMSF] by way of a lump sum are also excluded from bankruptcy [proceedings]. So I could have, for example, $2 million in my superannuation fund, draw down $500,000 from it and my trustee in bankruptcy can’t take one cent of it,” LightYear Docs founder Grant Abbott said.

“If I took a pension, then that is like an income stream and my trustee in bankruptcy can attack it.”

Abbott issued a reminder that a person who has been declared bankrupt can no longer be the trustee of an SMSF or a director of an SMSF corporate trustee, but recommended some immediate steps to implement that can help manage the situation if there is a high probability a member of the fund is facing bankruptcy.

To this end he advised the trustee’s SMSF account should be frozen as soon as the possibility the individual in question might be declared bankrupt arises. This effectively means retaining their member account and holding any of the fund’s income to which the member would normally be entitled in a reserve.

“We call that an investment reserve. So what we’re doing is we’re locking it off at that point in time, we put all the earnings into reserves, and earnings would also include any accretions to any capital, so we know exactly what their [entitlement] is,” Abbott said.

If the member is then declared bankrupt, their asset balance should be transferred to a public offer fund for the duration of their bankruptcy.”

“Once the bankruptcy is discharged, they can then [be allowed] back in,” he noted.

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