Trustee duties and payment of super death benefits: you must work on it**

Last week’s post explored the original decision in Re Marsella; Marsella v Wareham (No.2) [2019] VSC 65.

The case provided another example of the types issues that need to be considered by trustees of self managed superannuation funds before making a decision on how to distribute a member’s death benefits.

The original decision was upheld, essentially without any exceptions in the appeal case of Caroline Elizabeth Wareham and Martin Wareham (as trustees of the Swanson Superannuation Fund) v Riccardo Giacomo Marsella (both personally and as executor of the estate of Helen Freeth Marsella (also known as Helen Freeth Swanson)) [2020] VSCA 92.

The central arguments by the trustees on appeal revolved around their belief that they had exercised their discretion validly and therefore the payment of 100% of the death benefit to one of the trustees personally should be reinstated. As mentioned in last week's post, in essence this result would have been analogous to the outcome in the similar earlier case of Katz.

In rejecting the argument, the appeal court confirmed:

1. The trustees (through their lawyers) were on record as stating their belief that the deceased's surviving husband (who she had been married to for over 30 years) was ‘(not a) Beneficiary of the Fund’ - a conclusion that was plainly wrong.
2. There was also evidence to suggest the trustees believed they owed ‘no duty to the estate or other beneficiaries’ - again an erroneous assumption.
3. Furthermore the evidence supported a conclusion that the trustees had failed to look at the trust deed for the fund - a further breach of their duties.
4. Ultimately therefore the court concluded that if the trustees did not exercise their discretion upon real and genuine consideration, there was no proper exercise of the discretion. The fact that the discretion could have been properly exercised in the same way (ie to pay the benefit entirely to one of the trustees, as was the case in Katz) could not alter that position.
5. The court also confirmed the importance of the decision in the case of Karger v Paul (featured in other posts by View), and the fact that there are three obligations on a trustee exercising a discretion, namely:
• to do so in good faith;
• upon a real and genuine consideration (a requirement that is so obvious that it is often not mentioned); and
• in accordance with the purpose for which the discretion was conferred.

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

** For the trainspotters, the title of today's post is riffed from the Alicia Keys song ‘Work on it’.

Listen here:

Holistic Estate Planning for the New Year(‘s Day)** - Trustee duties and powers under discretionary trusts

The decision of Mantovani v Vanta Pty Ltd (No 2) related primarily to a lost trust deed, an issue explored in previous View posts.

Helpfully however, the decision also sets out a summary of the key duties owed by a trustee, noting that the office of trustee carries with it a number of strict obligations and duties, many of which are fiduciary in nature.

Fiduciary duties are generally seen as the most onerous of all legal duties and where they apply they require a person to act solely in another party's interests.

The case specifically confirms that the duties of a trustee include to:

1. become thoroughly acquainted with the terms of the trust and all documents relating to or affecting the trust property;
2. adhere rigidly to the terms of the trust and conform to and carry out the wishes of the settlor as expressed in the deed of trust; which is said to be ‘perhaps the most important duty’ of a trustee;
3. keep and render proper accounts and report to beneficiaries or to a court regarding the administration of the trust;
4. act fairly and impartially between beneficiaries;
5. administer the trust property in a way so as to avoid benefiting one beneficiary or set of beneficiaries at the expense of another;
6. make an application for judicial advice where the trustee requires advice or direction in relation to the management or administration of trust property or the interpretation of a trust instrument.

In relation to the last mentioned duty (ie to seek advice), it should be noted that a failure to seek advice has been held to be at the trustee’s 'own peril'. This is because any departure from the terms of the trust and any negligence in the performance of the duties of the trust will amount to a breach of trust.

Similarly, any acts in contravention of the duties imposed on the trustee by the trust or in excess of its powers will also be a breach of trust.

The ability of a court to review, and potentially unwind, a decision of a trustee, including for a breach of fiduciary duties, is in many respects predicated on the trust adviser's mantra profiled often in this journal, namely: 'read the deed'.

The issues in this regard can be particularly critical in relation to discretionary trusts where, at least in theory, there are few limitations placed on a trustee concerning most key aspects of the administration of the trust.

In a sentence, the rule the courts appear to apply is that a trustee's decision cannot be reviewed unless, on the material before the trustee, it is one that no reasonable trustee could have made.

What this rule means in any particular factual matrix can however be somewhat nuanced – reinforcing the value that advisers who adopt a holistic approach to estate planning can add in this space; pending ChatGPT taking over.

To learn more about holistic estate planning in 2023 – and specifically the following topics, join View’s next webinar (see: https://viewlegal.com.au/product/webinar-estate-planning-2023/):

• the key estate planning related court decisions over the last 12 months
• taxation and stamp duty changes impacting on estate planning
• the impact of key legislation changes
• latest examples of the attitude of the Australian Taxation Office towards various estate planning strategies
• insights into the latest bespoke planning opportunities we have sourced from the last 12 months

** For the trainspotters, the go to song for new year references is riffed today, namely U2 and ‘New Year’s Day’.

View here:

 

PPS – the image today is around the 12th year in a row of the image being taken with the same 4 kids in the exact same location.

PPS ... according to ChatGPT:

A trustee is a person or entity that holds and manages assets for the benefit of another party, known as the beneficiary.

Trustees have a legal duty to act in the best interest of the beneficiary and to manage the trust assets responsibly.

Some of the specific duties of a trustee include:

• Investing and managing trust assets in a prudent manner
• Keeping accurate records and accounting for trust transactions
• Providing regular reports to the beneficiary
• Following the terms of the trust document
• Avoiding conflicts of interest
• Acting honestly and in good faith

Trustees can be held liable for any losses to the trust assets resulting from their failure to fulfill their duties.

Sometimes** there are limitations on a trustee’s right of indemnity

A recent enquiry from an adviser was a timely reminder about the limit of a trustee’s indemnity from a trust fund.

In particular, the case from 2010 of Commissioner of Taxation v Bruton Holdings Pty Ltd (in liq) [2010] FCA 978 clearly explains the relevant principles.

Generally, a trustee discharging their duties will always be entitled to an indemnity for any liabilities incurred out of trust assets. The indemnity can be enforced by way of a charge or right of lien over trust assets that the trustee will have automatically at law.

Trustees must, however, show that the expenses or liabilities incurred were done so properly in the conduct of the business of the trust, including preserving and realising trust assets.

Where an entity is acting as bare trustee, their duties, powers and rights are however limited solely to protecting trust assets and then conveying them on demand from those ultimately entitled.

In Bruton, the trustee was not able to recover the costs out of trust property for running a Court case unrelated to merely protecting trust property, because at the time the liabilities were incurred (i.e. when the court proceedings took place, and the costs of the proceedings were incurred) the corporate trustee was acting as a bare trustee.

In other words, pursuant to a change of trustee document, the trustee was simply holding the trust property without any actual interest in it, pending the newly appointed trustee fully taking over management of the trust, and thus, the costs went beyond what the trustee was authorised to incur and be reimbursed for.

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

** for the trainspotters, ‘Sometimes’ is a song from Stevie Nicks. View hear (sic):