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:

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:

The (heavy) duty** to account

A reminder came to me recently about the duty of trustees ‘to account’.

Relevantly the High Court in Byrnes v Kendle [2011] HCA 26 highlighted that the term 'duty to account', encompasses several important obligations:

1. A duty to keep records;
2. A duty to report to the beneficiaries or the court concerning the administration of the trust; and
3. The duty to pay amounts, the trustee is obliged to pay to the beneficiaries.

The trustee's duty to account is a fundamental fiduciary obligation imposed upon a trustee.

In discharging that duty, the trustee is required to keep proper accounts of the trust.

Importantly however, in relation to the right of a beneficiary to request information from a trustee, there is likely to be a divergence in terms of the level of detail a trustee of a discretionary trust is required to provide a beneficiary, as opposed to the trustee of a unit or fixed trust.

In particular, in relation to discretionary trusts, where each beneficiary only has a mere expectancy (that is, as explained in other View posts, the right to be considered), the duty to account imposed on a trustee is likely to be less onerous than for fixed trusts.

This is because the trustee of a discretionary trust also has a duty to act in the best interests of all beneficiaries - which means disclosure of certain information on demand of some beneficiaries may not in fact be appropriate, if the trustee on reasonable grounds so decides.

Practically, where there is contention around these issues it may be the conclusion in Schmidt v Rosewood Trust Ltd (Isle of Man) [2003] 2 A.C 709 is most relevant. In this case it was relevantly held that a beneficiary's right to seek disclosure of trust documents and accounts, is best approached as one aspect of the court's inherent jurisdiction to supervise, and if necessary intervene in, the administration of trusts.

The nature of any court's intervention will depend on the court's discretion on a case by case basis.

In particular, the court will determine:

1. whether a discretionary object (or some other beneficiary with only a remote or wholly defeasible interest) should be granted relief at all;
2. what classes of documents should be disclosed, either completely or in a redacted form; and
3. what safeguards should be imposed (whether by undertakings to the court, arrangements for professional inspection, or otherwise) to limit the use which may be made of documents or information disclosed.

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

** for the trainspotters, ‘Heavy Duty’ is a song from Spinal Tap. 

 View hear (sic):

Guiding (star)** principles on trust interpretation

Following the post last week I was reminded of a related issue from the case of Harris v Rothery [2013] NSWSC 1275 that provides useful guidance in relation to the role of an appointor.

In many respects, the main focus in the decision was on the issue of whether the role of an appointor was a fiduciary one.

While the court held that for the purposes of the relevant deeds the role was not a fiduciary one (even though generally it will be), a number of other issues were addressed by the court that are important to the interpretation of trust deeds.

In summary, these included the following:

1. a later inconsistent document to a purported variation, including where the later document is set out in the will of a party can validly amend a trust instrument, depending on the provisions of the original document;
2. where a trust deed is prescriptive about the steps that must be taken (for example, providing written notification to a trustee) any purported change will only be valid on satisfying the relevant requirements;
3. similarly, if there are timeframes set out in the deed for the provision of notices, unless they are complied with strictly, the notice will be held to be ineffective;
4. unless a trust instrument requires original notices to be provided, then copies will suffice;
5. similarly, notices that are undated will not of themselves be invalid unless the trust instrument requires dated documents;
6. the provisions of a trust deed must be interpreted by reference to a reasonable objective construction, as opposed to how the parties subjectively interpreted them; and
7. the nomination of a replacement appointor will only take effect when the incumbent appointor is no longer able to act, unless otherwise expressly provided in the instrument of nomination.

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

** for the trainspotters, the title today is riffed from the Teenage Fanclub song ‘Guiding Star’. View hear (sic):

If 6 was 9 – Trust Naming Conventions – Part IX **

Continuing on from the last post and the type of trust deeds that can be created, this week’s post summarises another five types of trusts:

Special Disability Trust – this type of trust is regulated by government legislation and allows relatives of a family member who has a disability to establish a trust that has concessional income tax treatment, and also allows for any family home owned by the trust to still gain access to the main residence capital gains tax exemption. There are a number of particular rules in relation to how this form of trust must be established and operated.

Employee Benefit Trust – this type of trust is often set up by business owners as a way to provide discretionary bonus entitlements to key staff. The structure was very popular for a number of years, however active Tax Office compliance has meant that the range of circumstances where this type of structure will be useful is now relatively limited.

Business Succession Trust – from a business succession perspective, it is often important to help manage the exit of an ultimate owner by obtaining insurance cover for events such as death, trauma and total and permanent disablement. While there can be a number of complex issues that arise, one way to structure the ownership of the insurance policies is via a special purpose trust, often referred to as a 'business succession trust'.

Blind Trust – a blind trust is one where the trustee is the only party disclosed as being involved in the trust and the standard phrase 'as trustee for [name of trust]' is not disclosed. In a semi-blind trust, the existence of the arrangement is maintained on trust records. With completely blind trusts, there is no documentation in existence supporting the evidence of the trust and everything about the trust relationship is regulated verbally.

Sub Trust – particularly in relation to a discretionary trust that make distributions to beneficiaries, with those distributions remaining unpaid for extended periods, the trust instrument will often automatically create a 'sub trust' that permits the beneficiary to any time call for the payment of the unpaid distributions.

Each of the above trusts is explored in View’s book – 40 Forms of Trusts – Workbook.

** For the trainspotters, ‘If 6 was 9’ is a song by Jimi Hendrix from 1969.

NSW implications for all changes of trustee

With thanks to the Television Education Network, today’s post considers the above mentioned topic in a vidcast.

As usual, an edited transcript of the presentation is below:

There is a specific provision of the New South Wales Duties Act which requires that, in order to qualify for the stamp duty exemption where a change of trustee is occurring, the new trustee needs to be excluded as a beneficiary of the trust.

This means the trust deed needs to contain an express provision excluding any new trustee from being a beneficiary.

Advisers practicing in New South Wales are usually acutely aware of that limitation being in most of their trust deeds and of the resulting need to look at who may have been a previous trustee to see whether any beneficiaries are excluded.

The issue comes up quite commonly because several of the popular online trust deed providers use trust deeds from Sydney law firms, meaning that even though the trust deed might be ordered online by an accountant in Western Australia or a lawyer in South Australia, if the deed provider is based in New South Wales, the deed they’re providing probably contains this exclusion without the adviser being aware of it.

There are two reasons we need to know whether the deed contains the exclusion.

Firstly, if we are changing the trustee and we appoint a new trustee who is a beneficiary of the trust, then that change of trustee may be invalid or it may trigger unintended tax or stamp duty consequences.

Secondly, we may have individuals who were previously a trustee of the trust and who at face value appear to be a beneficiaries, but who were actually excluded as a result of the clause.

For instance, if Mum and Dad were individual trustees but they subsequently retired and appointed a corporate trustee, even though they may be named as beneficiaries of the trust, the exclusion clause may have made them ineligible to receive income or capital distributions.

An exclusion like this can have an impact from a family law perspective and also from a tax perspective, if we have been purporting to make trust distributions to individuals thinking they were beneficiaries, not being aware of this exclusion hidden within the trust deed.

Estate planning and the 2017 super reforms – the 11 things you must be aware of

The 2017 superannuation reforms are widely acknowledged as being the most fundamental changes to the superannuation landscape in over a decade.

While the reforms will have a significant impact across a range of areas, the consequences from an estate planning perspective are at risk of being overlooked.

In no particular order, the fundamental issues that must now be considered when managing superannuation entitlements from an estate planning perspective are as follows:

1. Where an individual has a reversionary pension for an amount currently in excess of the $1.6 million balance transfer cap (which will be indexed for CPI), steps will need to be taken to manage how the amount which gets rolled back to their accumulation account is dealt with upon their death – for instance, via a binding death benefit nomination.
2. While the exact factual matrix will always be critical, as a general comment, entitlements above the $1.6 million limit should be paid to tax death benefits dependants, ideally via a superannuation proceeds trust as part of a testamentary trust under a will (previous posts have explored various aspects of superannuation proceeds trusts, see Superannuation proceeds trusts, View Legal and superannuation proceeds trusts and Superannuation proceeds trusts: Tricks and traps).
3. The utility of a superannuation proceeds trust is significantly undermined where there are no death benefit dependants for tax purposes. Where a person has superannuation entitlements and no tax dependants, the consequences of the ‘fast death tax’ remain critical to consider. The so-called ‘fast death tax’ arises where funds that could otherwise be withdrawn tax free by the member during their lifetime remain in the fund at the date of death of the member and are then subject to tax on the distribution from the fund. 
4. The ability to make anti-detriment payments ends on 30 June 2017. Anti-detriment payments were beneficial in many situations, although had limited applications for self-managed superannuation funds. 
5. Any estate planning strategy will continue to be ultimately dependent on the trust deed for the relevant fund and a detailed review of the deed should be undertaken before any succession strategies are implemented. 
6. The conservative approach is that all trust deeds should be reviewed in light of the 2017 changes, with particular focus on the client’s estate planning objectives. Our experience to date is that in most cases, a deed update will be appropriate. 
7. Regardless of whether a trust deed is updated, reviewing related estate planning documents to ensure that they align with the client’s objectives is critical. In particular, all death benefit nominations and reversionary pensions must be reviewed (for instance, in the context of the $1.6 million transfer balance cap mentioned above). To the extent that there are binding nominations in place, the structure of those nominations may need to be updated (again, previous posts have explored a number of relevant aspects in that regard, see Superannuation and binding death benefit nominations (BDBN), Death benefit nominations – read the deed and Double entrenching binding nominations).
8. Similarly, the ability to make decisions, including potentially renewing or changing nominations in the event of a member’s incapacity, must be addressed by a comprehensive, superannuation compliant, enduring power of attorney. An appropriately crafted document in this regard will also provide a pathway to potentially avoid ‘fast death tax’ being triggered. 
9. The utility of reversionary pensions will be significantly undermined if the consequence of the reversionary pension is that the recipient exceeds their transfer balance cap. 
10. That said, in the right factual scenario, a child pension may provide planning opportunities as a child is entitled to access each of their parents transfer balance cap – in other words, if the two parents pass away, the children of the relationship can get access to up to $3.2 million. Unless a child has a permanent and significant disability however, any balance in a pension account on the child reaching the age of 25 must be commuted and paid to them as a lump sum. From an asset protection perspective, this has significant adverse consequences that need to be considered. 
11. A carefully crafted testamentary trust will, which can provide tax benefits that are broadly similar to those that could be obtained by a child allocated pension, may be preferable to ensure that access to capital only takes place at appropriate junctures and not automatically at the age of 25. 

Next week’s post will consider some of the specific post-death consequences of the new rules.

The above post is based on the article we recently had published in the Weekly Tax Bulletin. Finally, many of the themes in this post were featured in our recent Estate Planning Roadshow.

Download the brochure to purchase a full recording of the event here - https://viewlegal.com.au/product/recorded-webinar-package/

Image courtesy of Shutterstock

The trust beneficiary, there never was

As set out in earlier posts, and with thanks to the Television Education Network, today’s post considers the above mentioned topic in a ‘vidcast’ at the following link - https://youtu.be/_ZcDIESeE5A

As usual, an edited transcript of the presentation for those that cannot (or choose not) to view it is below –

The case study that we will explore here involved a husband who was breaking up with his spouse.

The husband had been the sole trustee of the relevant trust from day one. We'll call him Mr Y. Mr Y was also the primary beneficiary of the trust.

The wife was trying to argue that Mr Y had received distributions overtime and therefore she was entitled to percentage share of the trust.

So a fairly standard analysis of a family trust in a family law dispute. We were called in because the wife’s lawyer had the hide to actually read the trust deed.

The trust instrument stated that in relation to the definition of primary beneficiary, in no circumstances could a primary beneficiary receive distributions, if at any time the person was a trustee.

So from day one, the provisions of the deed had meant that Mr Y was never in fact a potential beneficiary of the trust and yet he had received significant distributions over an extended period of time. A fundamental issue triggered simply because no one had actually read the trust deed.

Interestingly, this type of exclusion of beneficiary class is in virtually every trust instrument from a New South Wales trust deed provider. More problematically, this type of provision is actually used by countless other deed providers as well, whether they're based in New South Wales exclusively or whether they in fact are based in other parts of the country.

In this regard, we are excited to be presenting half and full day Estate Planning Roadshow in Brisbane, Sydney, Melbourne, Adelaide and Perth that will explore a range of planning opportunities in this space.

For your limited opportunity to access special early bird pricing for our Roadshow, download the brochure here.

Watch the promo video below.

Superannuation proceeds trusts

Following last week’s post an issue has been raised as to whether the View wills provide for a Superannuation Proceeds Trust (SPT) -  and the answer is: Yes they do.

A SPT within a will (as opposed to last week’s post that related to a structure established outside a will) is a trust that is set up solely to receive the superannuation benefits of a member following death.

Generally, the beneficiaries of a SPT must be confined to persons who are ‘death benefit dependants’ of the deceased, being a:

a. spouse or former spouse of the deceased;

b. child, aged below 18, of the deceased;

c. person with whom the deceased had an ‘interdependency relationship’; or

d. person financially dependent on the deceased just before they died.

The benefits of having a SPT in a will are:

1. It provides greater asset protection compared to the superannuation death benefits being paid directly to a death benefit dependant - for example, against relationship breakdowns, creditors or spendthrift beneficiaries;

2. Distributions from the SPT will generally be excepted trust income, such that recipients under the age of 18 will be treated as adults;

3. The distribution of the superannuation death benefits to the SPT is taxed in the same way as if they had been paid directly to the death benefit dependant (provided the beneficiaries of the SPT are limited to tax dependants).

 Next week we will look in more detail at how View Legal structures SPTs in wills.

Image credit: Martin Gommel cc

Lessons from decisions since Spry

As set out in earlier posts, and with thanks to the Television Education Network, today’s post addresses the issue of ‘Lessons from decisions since Spry’ at the following link - https://youtu.be/IWsmKqpgwbs

As usual, a transcript of the presentation for those that cannot (or choose not) to view the presentation is below –

Immediately following Spry, the feeling of many observers was that there would never be any outcome in a family law matter other than to say that the assets of trusts were entirely exposed. 

What actually happened, however, is that despite the decision in Spry and a number of subsequent decisions have reinforced this, that trusts potentially remain a very robust asset protection vehicle.

Having said that, it is also clearly the case that the court will not be in any way restricted in terms of what they can and cannot do with the assets of a trust, if they have a legitimate reason to believe that there are grounds for doing so. 

Some examples might be if:

• the trust is actually the ‘alter ego’ of one of the parties to the relationship;
• it can be seen that the assets of the trust have really been created because of the joint effort of the relationship; and
• the assets of the trust have traditionally always been used for the benefit of not just the two spouses, but also wider family members.

In each of those types of scenarios, the court will rely on, if not Spry itself, certainly principles adjacent to Spry, to look beyond the trust structure and deal with the underlying assets of the structure.