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Exercising A Trustee’s Discretion In A SMSF
In the recent court case of Re Marsella; Marsella v Wareham (No 2)  VSC 65, the court was called upon to make a determination as to whether the trustee of a Self-Managed Superannuation Fund (“SMSF”) exercised its discretion appropriately and, if not, whether it should then be removed as trustee.
The decision highlights the importance of SMSF trustees exercising their discretion to pay death benefits in good faith, with genuine consideration, and in accordance with the purpose for which the power was conferred.
It is an important decision in the context of superannuation law as the court ultimately removed the trustee on the basis that the discretion was not exercised properly.
In this case, the deceased was survived by her second husband and her two children from her first marriage. The deceased was a widow when she met her second husband, and they were married for 32 years before her death in 2016.
During her lifetime, the deceased had established a sole member SMSF of which she and her daughter were co-trustees.The deceased had left an earlier binding death benefit nomination.However, at the date of her death, the nomination had lapsed, so no binding nomination was in place at the deceased’s date of death.
Pursuant to the terms of the deed that created the SMSF, the daughter as surviving trustee appointed her husband as a co-trustee, and on the same day they elected to exercise their discretion, as trustees, to pay the death benefits of approximately $450,416 to herself as the dependant of the deceased, with nothing to the deceased’s surviving husband of 32 years.
The deceased’s surviving husband brought a claim against the daughter and her husband as co-trustees of the SMSF, on the basis that the daughter and her husband did not exercise their discretion as the trustees of the SMSF in “good faith, upon real and genuine consideration and for a proper purpose” and that they had acted in conflict with their duties as trustees.
The key questions for the court were:
- Whether the trustees properly exercised their discretion when paying the deceased’s death benefit. Specifically, the court considered whether the trustees acted in good faith, with real and genuine consideration and in accordance with the purposes for which the power was conferred; and
- Whether the trustees should be removed as trustees, and the appointment of a new trustee.
Justice McMillan held that the trustees failed to exercise their discretion with a real and genuine consideration of the interests of the fund’s beneficiaries.In view of the improper exercise of discretion and significant personal acrimony between the daughter and the deceased’s husband, the trustees were removed as trustees of the fund.
The court highlighted the following points in determining that there was no proper exercise of discretion:
- The daughter did not seek specialist advice in relation to some uncertainties surrounding the trust deed of the SMSF.
- The “inference to be drawn from the evidence [was] that the [daughter] acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties.”
- The daughter “acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict.”
- “The ill-informed arbitrariness with which the [daughter] approached her duties also amounts to bad faith.”
- “The dismissive tenor of the correspondence from [the daughter’s lawyers]” to the second husband’s lawyers.
- The court ultimately found that the daughter’s husband had also acted in a position of conflict as the husband of the dependant who received the benefits from the fund.
This case is an important consideration for anyone who may be a trustee of a discretionary trust (including an SMSF). While the powers of a trustee are discretionary in such trusts, the trustee’s decisions must be carefully considered.
This case highlights that a disingenuous approach to the exercise of discretion may result in an aggrieved potential beneficiary bringing court action against a trustee of a SMSF.
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This article is for your information and interest only. It is not intended to be comprehensive, and it does not constitute and must not be relied on as legal advice. You must seek specific advice tailored to your circumstances.