Tuesday, March 28, 2023

I want it all** - Duties of SMSF trustees and yet another case concerning death benefit payments

In recent years the number of reported decisions in relation to death benefit payments by SMSFs have increased significantly. This is particularly so given that for many years the only substantive decision was from 2005, namely the case of Katz v Grossman [2005] NSWSC 934.

The decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65 provides another example of the types of issues that need to be considered in this area, and is particularly interesting given that there were some aspects analogous with the Katz decision, and yet the court reached the opposite conclusion.

Briefly in the Marsella case:
  1. the deceased was the sole member and a co-trustee with her daughter of an SMSF (similar to Katz);
  2. while historically a binding nomination had been signed, it had lapsed; and in any event was invalid as it nominated the member's grandchildren (who were not dependants as defined under the superannuation laws);
  3. the daughter appointed her husband as the co trustee following her mother's death (similar to Katz);
  4. the deceased's will provided certain benefits to her second husband. All remaining assets under the estate then passed equally to her daughter and her son (similar to Katz);
  5. the daughter and her husband resolved to distribute 100% of the death benefit to herself ignoring her brother (again similar to Katz) and her step father.
Unlike Katz, where the daughter was entitled to retain the entirety of the death benefit, in Marsella the payment was held to be invalid and the daughter and her husband were removed as trustees of the SMSF.

The court listed a number of reasons for reaching this conclusion, including:
  1. the daughter acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties and the way in which the superannuation laws are structured in this area;
  2. 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;
  3. as a result she was not in a position to give real and genuine consideration to the interests of the dependants;
  4. the above conclusion was supported by the outcome of the exercise of discretion, which itself was contrary to one of the daughter's key arguments - that being that her mother wanted the daughter and the brother (and the grandchildren) to benefit from the death benefit; and yet she paid 100% of the benefit to herself;
  5. ultimately, the court believed that the outcome of the daughter's decision was ‘grotesquely unreasonable’ which helped support the conclusion that the discretion was never properly exercised, or was exercised in bad faith;
  6. thus, the fact that the daughter was within the class of potential objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for proper purposes.
The above conclusions were upheld on appeal, and that decision will be explored in next week’s post.

As usual, please contact me if you would like access to any of the content mentioned in this post.

** for the trainspotters, an obvious choice, with Queen and 'I want it all'. 

 View here: