SMSF death benefit payment reversed by Court
Wills and Estates: 23 March 2019
A self-managed superannuation fund trustee has had her decision to distribute a death benefit to herself reversed by the Supreme Court of Victoria, in the recent case of Re Marsella; Marsella v Wareham (No 2).[1]
The Court found that the trustee of the fund, who was also the daughter of the deceased member, failed to give "real and genuine consideration to the interests of the dependantsof the fund, who also included the deceased's husband and a second child.
The hard-fought case highlights the importance of having measures in place to deal with interests in self-managed superannuation funds (SMSFs), include valid binding death benefit nominations and a succession plan for the trustees of the fund.
The facts
Mrs Marsella died leaving her husband of 32 years, and two children from an earlier marriage. Her husband was her executor. One of her daughters was a trustee of the SMSF and, after Mrs Marsella died, was the sole trustee.
Mrs Marsella did not have a valid death benefit nomination to deal with her SMSF interest. As such, the trustee was not bound to distribute the death benefit to any particular person. The payment of the death benefit was left up to the trustee's discretion.
After Mrs Marsella's death, disputes arose between the husband and the two children, which erupted into legal proceedings. While these proceedings were ongoing, the daughter acting as sole trustee of the SMSF made the decision to pay the entire death benefit to herself.
The issues
Superannuation death benefits may only be paid to a dependant, such as a spouse or child of the deceased member, or to the member's legal personal representative. When there is no binding nomination in place, the decision of how to pay is usually left to the trustee. In the case of an SMSF, this will often be a relative of the deceased and may well be a person who can also receive the death benefit.
In this case, there was no doubt that the daughter was a dependant of the deceased and was eligible to be paid the death benefit.
The questions for the Court were:
- Had the daughter exercised her discretion as trustee in good faith, and upon real and genuine consideration for the potential beneficiaries?
- Had the daughter committed a 'fraud on a power' by exercising the power in a manner not intended by the trust terms?
The decision
Justice McMillan held that the daughter had not acted in good faith, or given genuine consideration to the needs of the other potential beneficiaries of the death benefit. Her Honour said:
"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.[2]
Her Honour also considered whether the power was exercised for an improper purpose, and held that there was not sufficient evidence to make that finding. Nonetheless, the trustee's failure to give real and genuine consideration was sufficient for the Court to overrule the trustee's decision.
The judgment has just been handed down, and so may still be subject to an appeal.
Lessons learned
The first lesson is that making a binding death benefit nomination is the simplest and most effective way to avoid any disputes arising after your death regarding your superannuation. In Re Marsella, the most recent nomination made by the deceased nominated invalid beneficiaries, and had lapsed after three years from the time it was signed. This outcome could have been avoided with proper legal advice.
The second lesson is to establish a plan to transfer the control of your fund. In this case, it was entirely foreseeable that a dispute may arise between the husband and the children from a previous marriage, and that nominating an independent person to take over as trustee after the deceased's death would reduce the likelihood of a dispute. One need only look at Katz v Grossman,[3] where a daughter became the sole trustee of her late father's SMSF and overrode his binding nomination, paying the entire death benefit to herself.
Without both a binding death benefit nomination and a succession plan for control of the SMSF, family members may find themselves forced into costly litigation to resolve their disputes and protect their rights.
Finally, this case joins a line of recent cases reminding us that trust and fiduciary obligations have a major role to play with superannuation funds generally. Trustees, and their advisers, must be alive to conflicts of interest that trustees and fiduciaries can find themselves in, as recently we have seen:
- an SMSF trustee's decision to benefit themselves reversed;
- an executor made to repay a death benefit that she had applied for personally rather than on behalf of the estate;[4] or
- an attorney's decision to make a binding nomination which enlarged their own potential death benefit being declared invalid.[5]
Aitken Partners is a Doyles' Recommended Firm in Wills, Succession and Estate Planning and has acted in superannuation disputes, including the landmark Victorian case Wooster v Morris [2013] VSC 594.
[1] [2019] VSC 65.
[2] Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65, at [56].
[3] [2005] NSWSC 934.
[4] Estate of Burgess; Burgess v Burgess [2018] WASC 279.
[5] Re Narumon Pty Ltd [2018] QSC 185