When considering what is to happen to your self-managed superannuation fund (SMSF) upon your death, two primary questions must be answered:
- Who will, upon your death, receive your superannuation death benefits (SDB)?
- Who will, upon your death, take control of the SMSF on your incapacity or death?
The issue of control, how it must be exercised and the importance of seeking specialist advice is highlighted by the recent decision of the Victorian Court of Appeal in Wareham v Marsella  VSCA 92.
Wareham v Marsella
Helen Marsella was married to Mr Ricardo Marsella for 32 years. Helen had 2 adult children from her first marriage.
To manage her retirement assets, Helen set up a single member fund, the Swanson Superannuation Fund. Helen and her daughter Caroline Wareham were co-trustees of the Fund.
Helen died in April 2016 and was survived by her husband Ricardo.
Helen had made a purported binding death benefit nomination (BDBN), but it was void as it had expired and, in any event, named non-eligible beneficiaries (such as her grandchildren). Without a BDBN, Caroline as trustee was not legally required to distribute the death benefits to any particular superannuation dependent. As trustee, it was left to her discretion.
After Helen’s death, disputes arose between Ricardo and Caroline which escalated into legal proceedings and a strained relationship between them. While these proceedings were ongoing, Caroline appointed her husband as co-trustee of the Fund (for compliance purposes) and they resolved to distribute all the death benefits to Caroline (Resolution).
Ricardo commenced proceedings challenging the Resolution. At first instance, the trial judge set aside the Resolution and ordered the removal of Caroline and her husband as trustees of the Fund. On appeal, the Victorian Court of Appeal upheld the trial judge’s decision.
Court of Appeal
The Court of Appeal endorsed and applied the decision of Karger v Paul  VR 161, which held that a trustee must exercise a discretion under a trust deed:
- in good faith;
- upon real and genuine consideration; and
- in accordance with the purposes for which the discretion was conferred.
In this case, the key reason the Resolution was set aside was that the trustees had not given “real and genuine consideration” to the interests of all the superannuation dependents of the Fund.
In particular, it was found to be significant that the trustees’ solicitors had asserted in correspondence (incorrectly) that Ricardo was not a beneficiary or dependant and had no interest in the Fund. Further, they were found to have adopted a “dismissive” tone in responding to Ricardo’s concerns. This supported the conclusion that the trustees had not genuinely considered the interests of Ricardo as a dependant under the Fund terms.
Key to the Court of Appeal’s decision was the finding that trustees of a SMSF have a fiduciary relationship with the beneficiaries; for the purposes of a SMSF, this extends to the potential death benefit beneficiaries.
While a breach of trust or a conflict will not always lead to the removal of a trustee, in this case , both the improper exercise of a discretion and considerable acrimony between the parties meant it was appropriate for the trustees to be removed in the circumstances.
Comparison to Katz v Grossman
While the Court said that “the decision to pay no part of the death benefit to the deceased’s husband of more than 30 years was, at least, remarkable”, the trustees may have been much better placed to support the exercise of their discretion had they acknowledged the interests of Ricardo as a superannuation dependent, and requested information about his financial and personal circumstances to be in a position to make a real and genuine consideration of his interests.
It is interesting to contrast the result in this case with Katz v Grossman  NSWSC 934, which involved the trustee of a SMSF preferring their own interests. In that case, the surviving trustee was also the daughter of the deceased, who also appointed her husband as an additional trustee, who then also resolved to pay the entire death benefit to the daughter, to the exclusion of the son of the deceased. The son sought to question the appointment of the husband as trustee, but was ultimately unsuccessful, and the entirety of the death benefit passed to the daughter.
In light of the findings in Wareham v Marsella, an approach by trustees based upon Katz v Grossman considerations to exercise their discretion so as to prefer their own interests above others must now be considered vulnerable to challenge.
Wareham v Marsella highlights the following issues:
- Potentially significant problems arise if a member of a SMSF dies without having validly executed an up to date BDBN such that the trustee must pay any death benefits in accordance with its terms.
- The importance of who takes control of the SMSF and how the trustee must exercise their discretion (in the absence of BDBN) when paying a death benefit cannot be understated.
- A trustee is subject to strict fiduciary duties which they must consider when exercising a discretion.
- The necessity of a trustee getting expert advice before paying a death benefit or exercising a discretion, in particular in their own favour.
A SMSF trust deed can be varied to simplify the process of making a BDBN including permitting a non -lapsing BDBN.
Before you exercise a discretion as a SMSF trustee, it is essential to get specialist legal and accounting advice. The courts have repeatedly emphasised that a trustee must genuinely consider the interests of all the potential beneficiaries and the reasons for the exercise of any discretion in particular if it is in the trustee’s favour.
In relation to your own superannuation, it is essential to ensure that your SMSF trust deed is current and that you have made valid BDBNs pursuant to that deed. Many BDBNs fail because they are not in the required form and not made in accordance with both the SMSF trust deed terms and relevant law. Get specialist advice before making a BDBN.
Zafra legal can assist you or your clients regarding payment of SDB, preparation of BDBN (including non-lapsing) and other related advice.
Zafra Disclaimer: this article is intended to provide commentary and general information only. It should not be relied on as legal advice. Formal legal advice should be sought in the particular transaction or matters of interest arising from this article.