Thursday, May 11, 2023

Here we go again** - invalid BDBNs and failed changes of trusteeship

View Legal blog – Here we go again** - invalid BDBNs and failed changes of trusteeship  by Matthew Burgess

In holistic estate planning, disputes in relation to SMSFs - and particularly (purported) binding death benefit nominations (BDBN) - are arguably risks of such high probability that there is need for advisers to consider the issues habitually.

The decision in Williams v Williams & Anor [2023] QSC 90 provides a stark example in this regard.

The factual matrix in this case was arguably 'generic' for a material number of SMSFs, that is a blended family with competing interests and (arguably) less than ideal documentation.

In particular:
  1. the deceased member of a sole member fund purported to sign a BDBN in favour of a 50% allocation to each of his second wife and his legal personal representative (LPR), for distribution of this portion under his will;
  2. the trustees of the fund at the date of the relevant BDBN were the deceased and one of his 2 adult sons;
  3. while the deed for the SMSF appeared to require the BDBN to be provided to both trustees in order to be effective, the son (in his role as co-trustee) denied having ever been provided with the document. The son as surviving trustee relied on the fact (that was accepted by the court) that he had not been given the BDBN as supporting a conclusion that the BDBN was void and should be ignored by the trustee, who instead should distribute the death benefit in its discretion.
In relation to the invalidity of the BDBN, the court confirmed:
  1. the purpose of communicating a BDBN to the trustees is largely practical - that is, to give effect to a BDBN the trustees must know about it and, in the case of multiple nominations, must know which was current and which had been superseded (these points were confirmed in the decision of Cantor Management Services Pty Ltd v Booth [2017] SASCFC 122, a case featured in other View posts, which in a similar factual matrix confirmed that a BDBN sent to the registered office of the corporate trustee was a valid approach for a member to provide the requisite notice to the trustees);
  2. while the trust deed had standard provisions that deemed 'singular wording to include plural' and vice versa (a provision that is included by statute in all deeds and instruments, for example see section 48(1) of the Property Law Act 1974 (Qld)) - these type of provisions were subject to the context of the trust deed;
  3. so too the provisions in the trust deed that provided 'the "Trustees or the Trustee for the time being of the Fund" and “Trustee” have the same meaning' were subject to the context of the wider deed and required that where there was more than one trustee the word 'trustees' should be taken to mean all the trustees;
  4. thus while the deceased member was aware of the BDBN he had signed, and was also a trustee, the context of the trust deed required both trustees to be notified. This conclusion was further supported by the fact that the deed required that on receiving the written notice, certain further steps be taken, namely, the trustees creating a written resolution accepting the terms of the BDBN;
  5. in other words, the knowledge of the deceased member could not automatically affect the co-trustee with knowledge of the transaction (see Cummings v Austin (1902) 28 VLR 347).
The other key aspect of the decision also serves as a blunt reminder of the 'read the deed' mantra so critical for all trust advisers, including in the SMSF space. In particular, a purported change of trusteeship by the surviving son to appoint his brother as a co-trustee was held to be invalid for a range of reasons, including:
  1. the relevant documentation purported to have the deceased member as a party - at a minimum the relevant party would have needed to be the deceased member's LPR;
  2. while the deed gave a two-thirds majority of members the right to appoint a trustee, the relevant documentation did not rely on these provisions;
  3. while the deed also appeared to allow a member's LPR to assume the rights of the member in relation to trustee appointment, the definition of LPR under the deed was limited to a person who had obtained probate of the member's estate; and probate had not in fact been obtained. Therefore, for the purposes of the deed, there was no LPR of the deceased member and the provisions giving rights to the member's LPR were a nullity.
In many respects, a number of the failings in relation to the change of trustee documentation were analogous to the factual matrix in the case of Moss Super Pty Ltd v Hayne [2008] VSC 158, again another case featured in other View posts. In this decision, although not referenced in the Williams case, the trust deed set out the process by which a change of trusteeship could take place and specifically required the 'founder' to appoint any new trustee. While the sole director of the new trustee company was also the founder, she did not in fact sign the change of trustee documentation in her capacity as founder.

In other words, while she signed in her capacity as the sole director of the new trustee, there was no provision where she also signed in her founder role.

Critically, the court found that where structures are created in which individuals have multiple roles to play, the requirements around those roles must be respected and complied with.

Based on the above failings in relation to the purported change of trusteeship - and further concerning conduct and clear conflicts of interest for the son - the court concluded it was appropriate to remove the trustee. The court determined instead to appoint independent trustees, relying on the largely discretionary right for a court to form a judgment on what is in the best interests of the beneficiaries, based upon considerations, possibly large in number and varied in character, which combine to support the conclusion, see Miller v Cameron [1936] HCA 13.

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** for the trainspotters, the title today is riffed from a line in the Whitesnake song ‘Here I go again’.

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