Re Marsella: the exercise of discretion by a trustee in paying benefits from an SMSF

Re Marsella: Marsella -v- Wareham (No 2) [2019] VSC 65

On the death of a member of a self-managed super fund (SMSF), that deceased member has a death benefit which needs to be paid. When there is no binding nomination in place, the trustee of the SMSF generally (read the deed…) has discretion as to how to pay that death benefit amongst the eligible dependants of the deceased[1].

There is very little case law on how a trustee must exercise its discretion when making this decision. In practice trustees of SMSFs generally consider their discretion to be absolute and unfettered, and this view would generally be supported by their advisors.

This case looks at the exercise of that discretion and contrary to current practice imposes a substantial duty on trustees of SMSFs to give real and genuine consideration to eligible recipients, and to document such consideration.

Facts

Ms Helen Marsella was married for 32 years to Mr Ricardo Marsella. Ms Marsella had 2 adult children from an earlier relationship.

Ms Marsella and her daughter Ms Caroline Wareham were members and trustees of a super fund, the Swanson Superannuation Fund (the Fund).

Ms Marsella had made a death benefit nomination but it was no longer relevant because not only had it expired in accordance with the trust deed, but also that it attempted to name non-eligible persons as the beneficiaries, namely grandchildren.

Ms Marsella died on 27 April 2016.

As is usually the case in estate litigation, relationships between the parties were substantially strained. The wider context was that, in addition to this current case, Mr Marsella had commenced an application against the estate for further provision and Ms Wareham had made a claim that the main residence of the estate was held on trust for her.

Ms Wareham was the surviving trustee of the Fund after her mother’s death and, after obtaining legal advice, she appointed her brother Mr Wareham as a co-trustee. The accountants for the Fund were urging that the death benefit be paid out because of the requirement of the Australian Taxation Office (ATO) that death benefits be paid as soon as practicable (which is generally considered to be within 4-6 months of the death of death).  The 2 trustees of the Fund resolved the death benefit be paid to Ms Wareham and that the Fund be wound up immediately.

The solicitors for Ms Wareham asserted that, in correspondence to solicitors for Mr Marsella:

You will know that a discretionary trustee is not required to give reasons for any decision and our client does not do so. You have asserted no foundation for an improper exercise of discretion.  You refer to a conflict of interest but we fail to see how that allegedly arises.  The trustee is permitted to exercise their discretion, to any eligible object, which includes herself.  Our client owes no duty to the estate or other beneficiaries …“.[2]

Those assertions would be well supported by many estate planning practitioners based on earlier caselaw. Traditionally, a Court is reluctant to undertake any examination of the merits of an exercise of discretion of a trustee.  This is one of the reasons why, in previous disputes over the payment of death benefits, the plaintiffs have often not challenged the exercise of discretion of the trustee of the SMSF but, instead, have attempted to attack other elements of the death benefit transaction, including the appointment of the trustee or whether a death benefit nomination was binding or non-binding.  The parties in those cases assumed that it would be fruitless to attempt to challenge the actual decision made by the trustee when they were exercising a discretion held under the trust deed.

Justice McMillan examined the duties on trustees when exercising a discretion. The Court noted that the trustee, when exercising discretionary power, has “a duty to exercise the power in good faith upon real and genuine consideration and for the purposes for which the power was conferred[3].

The Court said that the trustees had a duty to consider Mr Marsella and rejected an assertion that he had “no interest” in the Fund. Law students and lawyers alike fret and squabble over what the meaning of an interest in a trust is.  Justice McMillan here was satisfied that being a “potential object of the exercise of discretion” i.e. a potential recipient of the superannuation death benefit, gave Mr Marsella an interest in the Fund.  This would be vehemently and, I suspect, unanimously rejected when considering whether he had interest in the Fund for particular tax, stamp duty or property law purposes.  However, we are now deep in the waters of trust law and equity and our feet can no longer touch the bottom.

The following quote from Justice McMillan is a handy guide as to how equity operates in this area of law:

While it is not the Court’s role to consider the fairness or reasonableness of the outcome of the exercise of discretion and usurp the role of the trustee, the outcome itself, particularly where the result is grotesquely unreasonable, may form evidence that the discretion was never properly exercised, or was exercised in bad faith.”

The Court said that the circumstances of the case i.e. the other litigation and the apparent broken down relationship between the parties, combined with the outcome of the trustee’s decision to pay the money solely to the deceased’s daughter and to no one else, supported “the conclusion that there was a lack of real and genuine consideration[4].

The Court said that even though the deceased had apparently not chosen to nominate her husband as a beneficiary, it was a failure on the part of the trustee to take proper consideration of Mr Marsella as a potential beneficiary because there was no evidence that she considered the long relationship between the deceased and Mr Marsella and his relatively limited financial circumstances.

The Court was scathing of the actions of the trustee, describing her as being insolent towards her duties, and approaching her duties with ill-informed arbitrariness which amounted to bad faith.[5]

There must be some sympathy for the trustee. In the minutes of the meeting where it was resolved to pay the death benefit to herself, the trustee had included a statement that the trustee had considered “the possible interests of all the dependants of the deceased member, the potential eligible beneficiaries of the member, and the member’s estate[6].  However, the Court dismissed this as being merely formulaic consideration and not proper consideration of Mr Marsella as a potential beneficiary.

Identity of trustee

The Court also examined the decision to appoint the trustee’s brother as the other trustee. Whilst Justice McMillan accepted that s.17A allowed for another relative to be appointed as trustee, the Court queried whether there was an obligation to appoint the executor as one of the trustees of the Fund i.e. whether Mr Marsella should have been appointed.  There is no such obligation in the Act.

The Court looked to a comment in another case[7] which provided that where the sole member of an SMSF with a corporate trustee has died, the executor must become director of the corporate trustee for the fund to remain compliant. It is not clear that that case was relevant here given that there was no corporate trustee in this super fund.  An ordinary reading of the text of the Act seems to dismiss the concerns of the Court in this regard.

Decision

The Court said that the current trustees had:

  • not given real and genuine consideration to the interest of the spouse and executor of the deceased;
  • dealt arbitrarily with the property of the Fund, being property subject to a trust; and
  • did this in the context of substantial personal conflict with Mr Marsella; and

therefore it is appropriate for the defendants to be removed as trustees[8].

The current trustees were removed, and their decision to nominate Ms Wareham as beneficiary was overturned on the basis of failure to properly consider other beneficiaries.

The Court invited the plaintiff to make further submissions as to who the new trustee of the Fund ought to be, keeping in mind the requirements of the SIS Act.

Lessons

This case potentially sets the law on how superannuation death benefits are paid from an SMSF on a different direction to the history of the law to date. Previously we would have been confident in telling you that the trustee of an SMSF is entitled to nominate themselves as the sole beneficiary of the assets of the Fund regardless of any ongoing litigation or any other potential beneficiaries, so long as they complied with the Act and the trust deed.

However, the reasoning from this case suggests the law maybe more similar to that found within family provision cases. The trustee must at least to some degree, act as if in the role of an equity judge assessing a family provision claim and consider the relative merits of each potential beneficiary.  Therefore, the trustee must consider the deceased’s children and spouse, including:

  • their relationship with the deceased;
  • their relationship with the trustee and particularly whether there is any ongoing conflict;
  • the financial circumstances of each potential beneficiary;
  • how the deceased has already provided for the respective beneficiaries under their will or other estate entities such as family trusts; and
  • the potential conflict in the trustee paying themselves.

When circumstances similar to this case arise in the future, i.e. where the trustee is a step-child of a surviving spouse and there is litigation ongoing (which is the common scenario in death benefit dispute cases!), then the very fact that the surviving spouse is not the recipient of the death benefit may itself warrant the removal of the trustee from the Fund. One wonders what would happen if the new trustee of the Fund made the same decision?

If acting for a claimant seeking the superannuation, we now have a powerful new precedent in our litigation toolkit.

How to determine a death benefit beneficiary securely?

It used to be said, including in earlier publications of this bulletin, that control of the fund is the most critical aspect of securing a death benefit. This was because in the event of failure of a nomination, the trustee could determine who they desired as beneficiary with substantial freedom.  This no longer holds true.

Now, the greatest path to certainty where there may be competing beneficiaries, particularly in blended families, is to have a valid non-lapsing binding death benefit nomination. The trustee then has no discretion, but a simple duty to pay the death benefit as directed.

Other planning options include (with varying degrees of utility and practicality):

  • death benefit agreement/s; or
  • hardwiring the terms of the trust deed.

Providers of SMSF trust deeds will now need to review carefully any provisions in their trust deeds about how the trustee must exercise their discretion to nominate a beneficiary in the absence of a binding nomination. Presuming we want the trustee to have as much discretion as possible, the trust deed should unequivocally state this.  However, the deed in question in this case provided:

the Trustee shall have … an absolute and unfettered discretion and is not bound to act subject to the direction of any other person unless otherwise expressly provided by the Act

The trustee’s duty to consider all beneficiaries in exercising their discretion will remove much of the arbitrariness suggested by provisions similar to that outlined above.

Perhaps of greatest benefit could be varying the trust deed to limit the classes of beneficiaries, so that the trustee has no duty to consider them at all. There is no requirement that all SIS Act dependants be beneficiaries under the trust deed – this is done as a matter of convenience by SMSF Deed providers so that ‘one size fits all’.  Tailored SMSF Deeds may be worth considering.

If on death there is no binding death benefit nomination in place and there is a high likelihood of a claim on the superannuation:

  • consider appointing an independent party as director/trustee of the fund to remove the potential conflict of interest;
  • obtain as much information as possible about the financial circumstances of the respective competing beneficiaries and document the consideration in detail*[9]; and/or
  • obtain evidence as to the wishes of the deceased, if any.

Interestingly in this case the Court was not satisfied that continuing the apparent estate plan of the testator was a reasonable exercise of discretion (the deceased had previously not nominated her husband as a beneficiary so the trustee argued she was complying with the deceased’s wishes by not paying him). Therefore, a letter of wishes or non-binding death benefit nomination may not convince a Court that a proper exercise of discretion would be to follow those wishes.

Discretionary trusts

The application of aspects of the reasoning of this case to ordinary family trusts could have far reaching consequences. It would suggest that the trustee of a family discretionary trust must consider in exquisite detail, each and every one of the (typically) many extended relatives and charities which are found as beneficiaries in the family trust deed.

However it may be that future decisions limit the precedential value of this case to the context of self managed superannuation where there are substantially fewer potential claimants.

A comment on identity of the trustee in such instances

In determining the identity of the new trustee, the SIS Act would require that the executor or relative be trustees or directors of the corporate trustee. However sub-section (4) of s.17A allows a period of 6 months to “put your house in order” in relation to the identity of the trustee – so it may be that an independent person such as an accountant or solicitor could be nominated as the trustee or director of a corporate trustee who could then resolve to pay out the death benefit and wind up the fund prior to the 6 month period elapsing.

[1] Pursuant to the Superannuation Industry (Supervision) Act 1993 (SIS Act), the persons eligible to receive a death benefit from a deceased are the legal personal representative (i.e. their estate) and then spouse, children, financial dependants and persons who are in a relationship of inter-dependency with the deceased.

[2] Quoted at paragraph 32

[3] At paragraph 47

[4] At paragraph 51

[5] At paragraph 56

[6] At paragraph 54

[7] Cantor Management Services Pty Ltd -v- Booth [2017] SASCFC 122

[8] At paragraph 73.

[9] This is a double edged sword.  If the preferred beneficiary is financially secure, and the claimant is financially strained, then for the trustee to document this prior to making a decision is likely to be in favour of the claimant.

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2019-03-21T09:20:06+00:00March 21st, 2019|