The lessons learnt from the recent case of Re Marsella; Marsella v Wareham (No 2) [2019 VCS 65)] are two-fold:
- one, the case highlights the importance of SMSF trustees being aware of their duties and responsibilities when paying death benefits in the exercise of discretion; and
- two, it brings to the forefront how proceedings like this can be avoided by a superannuation fund member proactively addressing their estate planning before it’s too late!
Helen Marsella (“Helen”) and her daughter Caroline were the trustees of a SMSF. Helen was survived by her husband Riccardo and her two children from her previous relationship, including Caroline. Riccardo was the executor of Helen’s Will.
Caroline resolved as the surviving trustee to pay all of Helen’s death benefits to herself. Helen had no valid binding nomination in place. On the same day, Caroline also appointed her husband, Martin, as a co-trustee of the fund and there was a further resolution by Caroline and Martin to distribute the death benefits to Caroline solely. The resolutions stated that the trustees had given due consideration to “the possible interests of all Dependants of the deceased member, the potential eligible Beneficiaries of the Member, and the Member’s Estate”.
Riccardo sought to have:
- Caroline and Martin replaced as trustees; and
- the repayment to the fund of the amount distributed as death benefits together with interest.
Riccardo argued that the trustees did not give “real and genuine consideration to the interests of the dependants of the fund and the distribution made from the fund should be set aside”.
Of particular note in this case is that Caroline had been advised to seek specialist advice. She had been made aware of:
- the importance of paying out the death benefits “as soon as practicable”; and
- the need to consider the interests of all of Helen’s dependants as defined in the fund trust deed.
The Court was asked to consider:
- Whether the trustees properly exercised their discretion in resolving to distribute the death benefits; and
- Whether Caroline and Martin should be replaced as trustees.
In setting aside the exercise of discretion, Justice McMillan held that the trustees failed to exercise their discretion with a real and genuine consideration of the beneficiaries of the fund in determining to pay the death benefits to Caroline.
Justice McMillan stated that whilst it wasn’t the Court’s role to consider the fairness or reasonableness of the outcome of the exercise of discretion or usurp the role of the trustee, if the result is “grotesquely unreasonable”, the outcome may form evidence that the discretion was never properly exercised, or was exercised in bad faith. Relevant factors for consideration included:
- the intention of the deceased;
- the relationship between the dependant and the deceased; and
- the financial circumstances and needs of the dependant.
Here, the trustees ignored Riccardo’s and Helen’s substantial relationship and his relatively limited financial circumstances.
In the judgment, Justice McMillan was particularly scathing of Caroline noting that she had proceeded with the appointment of a co-trustee and distribution of benefits in the context of uncertainty, significant conflict and lack of recommended specialist advice.
Her Honour also determined that in the context of an improper exercise of discretion, conflict and personal acrimony between the parties, Caroline and Martin should be removed as trustees.
Riccardo was required to make submissions to appoint a replacement trustee or corporate trustee.
Key case lessons
With cases on death benefit payments becoming more common, there are some key lessons from this decision:
1. Trustee Discretion
Trustees need to be aware that their responsibilities extend to decisions required to be made when paying out death benefits, as part of accepting their appointment as trustee or director of the trustee company. In the absence of a valid binding nomination, factors that are relevant in determining whether the discretion of the trustee is exercised in good faith and upon real and genuine consideration include:
- The inquiries the trustee made, and the information they had;
- Whether the trustee has informed her or himself of the matters relevant to the decision, including seeking specialist advice in light of the size of the fund and complexities surrounding the fund deed and compliance with the SIS Act;
- The intention of the deceased;
- The relationship between the deceased and the dependants;
- The financial circumstances and needs of the dependants; and
- Whether the trustees acted in the context of uncertainties and/or misapprehensions.
2. Proper and current estate planning
For superannuation fund members who want certainty about who receives their superannuation benefits (particularly in the context of a second relationship where there may be different objectives for different assets and interests), this case illustrates the significance of having a valid binding nomination or reversionary pension in place.
Most people still believe that it is their Will that is the most important document when dealing with the passing of assets on deal and will often prioritise updating or seeking advice on their Will, without thinking about who their superannuation is to end up with.
Thinking about succession to control of a SMSF is also important so as to ensure that the fund has the right people in control on death (and even on incapacity). For example, it is likely that there would have been a different outcome in the exercise of trustee discretion in Re Marsella had there been a company as trustee, of which Helen (as the sole member) was the sole director. Riccardo may have taken control of the SMSF in his capacity as Helen’s legal personal representative and determined to pay all of the death benefits to himself. In this instance, it may also be prudent to have an express authority in the Will for a spouse to claim and receiving death benefits personally and not in his or her capacity as legal personal representative.
Whilst a trustee’s discretion is absolute and unfettered, this case highlights the willingness of the Courts to remove trustees and set aside decisions in instances where trustees have not acted in good faith.
To avoid this, it is recommended that trustees seek advice particularly where there may be some uncertainty or complexity. Proactively though, fund members should regularly review their estate planning to ensure that their documentation accords with their intentions. Where there is a SMSF involved, this potentially includes a current binding nomination, pension documentation, Will and super fund deed.
For more information or expert advice, please do not hesitate to contact us.