An SMSF is a good asset protection vehicle for times when a fund member has been or is about to be enter 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 SMSF, drawdown $500,000 from it and my trustee in bankruptcy can’t take one cent of it,” LightYear Docs founder Grant Abbott told delegates at his company’s virtual Master Strategy Day 2021 last Friday.
“If I took a pension, then that is like an income stream and my trustee in bankruptcy can attack that.”
Abbott reminded advisers 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 to help manage the situation if there is a high probability a member of the fund is facing bankruptcy.
“As soon as you get [an inkling a trustee might be declared bankrupt] what you need to do is effectively stop their account. So keep their account in [the fund] but [ensure] all the earnings of the fund won’t go to the member’s account. [Instead they] will actually go to a reserve,” he advised.
“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.”
If the member is then declared bankrupt, their asset balance should be transferred to a public offer fund for the duration of their bankruptcy, he said.
“Once the bankruptcy is discharged, they can then [be allowed] back in,” he noted.
