SMSF Death Benefit Decision

On February 2019, in the Victorian Supreme Court decision of Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65, the court set aside the trustee’s decision to pay the death benefit to herself, and the trustee was removed as a trustee of the fund.

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 SMSF of which she and her daughter were individual co-trustees.  The deceased had left an earlier binding death benefit nomination, however, at the date of her death, the binding nomination had lapsed. Accordingly, no valid nomination was in place at the deceased’s date of death.

Pursuant to the SMSF Deed, 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 entire death benefit of approximately $450,416 to the daughter as the dependant of the deceased, with nothing to the deceased’s surviving husband (the trustee’s stepfather) 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 trustee of the SMSF in ”good faith, upon real and genuine consideration and for a proper purpose” and that they 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 whether a new trustee should be appointed.

McMillan J held that the trustees failed to exercise their discretion with a real and genuine consideration of the interests of the fund’s beneficiaries, and in the context of an improper exercise of discretion, and significant personal acrimony between the daughter and the deceased’s husband, the trustees were to be removed as trustees of the fund.

The trustees appealed this decision.

On 20 April 2020, the Victorian Court of Appeal dismissed the appeal.

The decision to dismiss the appeal reinforced many of the important lessons from the original judgment in trustees acting improperly in making the death benefit payment decision.

So What Did The Court Of Appeal Say?

For the appeal, the principal issues were:

• Whether the trustees gave a real and genuine consideration to the persons who might potentially benefit from the exercise of the discretion regarding the payment of the death benefit,
• Whether the daughter had acted in bad faith, and
• Whether the trustees should be removed.

The decision by the Court of Appeal confirmed that, in making death benefit payment decisions, the trustee of an SMSF must act in good faith, upon a real and genuine consideration, and in accordance with the purpose for which the choice was given. The court confirmed that, in this case, the trustees did not do so.

Particularly (at 62) they said:-

“On balance, the inference to be drawn from the evidence is that the first defendant acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties. She acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict. As such, she was not in a position to give real and genuine consideration to the interests of the dependants. This conclusion is supported by the outcome of the exercise of discretion.”

Real & Genuine Consideration

In the appeal decision, the court commented that, although the trustee obtained legal and accounting advice, it was not from a specialist in the superannuation field. The court carefully reviewed the trustees’ minutes and correspondence from the trustees’ solicitors, noting errors in the trustees’ minutes.

The court commented that the fact that the minutes referred to the definition of ”dependant” did not mean the trustees understood the definition, and it could not be inferred that the trustees had properly considered all dependants.

In relation to the correspondence from the trustees’ solicitor, this was sent after the death benefit decision had been made and stated that the estate and the deceased’s husband had no interest in the death benefit payment. This was relevant to determining the likely advice the trustees received before making the death benefit decision.

Conflict Of Interest

The trust deed contained a clause allowing the trustee of the fund to enter into conflict transactions. The trustee argued that this clause forgave the conflict that the trustee had in paying the death benefit to herself. However, the court held a different view. The court said that the provision in the trust deed was not enough to forgive the actual conflict and that the personal conflict between the parties and the relationship breakdown meant that the trustee could not have exercised her duties impartially.

Removal As Trustee

The trustee argued that, even if the original death benefit decision was to be set aside, the trustee should remain as trustee to re-make the decision. In considering this, the court said the trustee’s decision to pay the death benefit to herself was based on a failure to give the decision real and genuine consideration. There was a risk moving forward that, even with proper advice, the trustee would not properly consider all potential beneficiaries.

As a result, her removal as a trustee was justified.

What a SMSF trustee must do

The court decisions in Re Marsella provide some very useful reminders on what an SMSF trustee must do when exercising their discretion to pay a death benefit. In particular, the decisions highlight that:

• All advice provided to the decision-maker should be clear and consistent with their legal obligations.
• The trustee should obtain specialist advice from a superannuation and trust law specialist.
• Where the decision-maker is also a possible beneficiary, extreme care should be taken to ensure that any conflict has been properly assessed.
• All communications (both verbally and in writing) should be legally correct and not contain any wrong information.

The decision of the Court of Appeal is a reminder that courts will reverse trustee’s decisions and remove trustees if they do not act in accordance with their duties.

This case highlights that a disingenuous approach to the exercise of discretion may result in an aggrieved potential beneficiary bringing an application against a SMSF trustee.

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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.

This article was originally published on the 30 September 2020. It was last updated on 26 August 2022.