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'. 

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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. 

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Stamp duty concessions for business succession: it is (not) just a game**

As we have touched on in previous View posts, each Australian state has a different set of stamp duty rules.

In a very general sense, the broad themes under each state’s legislation are similar.

As is often the case however the detail of particular provisions can provide quite stark contrasts.

This week, I had a timely reminder of the differences between states in relation to the stamp duty concessions available for the transfer of assets under a succession plan from (say) parents to their children.

Under the New South Wales legislation, there are a number of flexibilities with this concession, including (in certain circumstances) the ability to transfer assets out of a company into the individual names of the children of the shareholders.

In contrast, the Queensland legislation (which is in fact broadly modelled on the New South Wales legislation) has no equivalent exemption.

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 Regurgitator song ‘Black Bugs’.

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Do you know Hoo(doo) is your customer?

In recent times, we have had a number of situations where, when acting for a family group, one member of the group is particularly concerned about asset protection issues.

All advisers providing guidance in this space should be aware that from a privilege perspective, much can turn on very practical issues such as:

1. Who the customer is defined as being?
2. In what name the file is opened up in?
3. Who the correspondence is directed to (including via email)?
4. Who is invoiced?
5. Who pays the invoice?

While each of these issues can on their face seem quite benign, if the worst turn of events occurs (and bankruptcy proceedings are commenced), each of the above points can become quite critical.

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 Hoodoo Gurus song 'Hoodoo you love'.

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Why a willmaker’s domicile may trigger a step back in time**

Where a person is domiciled is one of the more difficult and potentially frustrating areas of the law.

A key reason the issue can be so problematic is due to the rules in relation to ‘conflict of laws’ – that is determining which rules apply when there are two or more potential jurisdictions in relation to a certain set of circumstances.

The conflict of laws regime is inherently problematic and one of the most highly specialised of all legal disciplines.

In very broad terms, a person is domiciled where 'their heart calls home'. This means that they need not necessarily be physically located there or indeed have any assets in that particular jurisdiction.

The issue of domicile can arise in a number of situations.

In an estate planning context however, most of the complex issues in relation to domicile only arise in situations where people die without a will (i.e. intestate).

One of the first steps therefore that should be looked at as part of an estate plan where the place of domicile may become an issue is to at least get in place temporary estate planning documents as a matter of urgency.

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 Kylie Minogue song 'Step back in time'.

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SMSF borrowing arrangements and business succession: a modern life** story

We recently had an adviser seeking guidance in relation to business succession arrangements where business property was to be purchased by two parties via their self-managed superannuation funds, with a limited recourse borrowing arrangement.

The three main approaches that we explained are as follows, noting that the preferable solution depends on the exact commercial circumstances:

1. As the intention with the borrowing arrangements is normally that they are self-funded, some business owners choose to leave the structure in place and have an unfunded agreement (for example, a unit holder’s agreement) regulating how the parties will conduct themselves if one of the principals passes away.
2. In other words, the deceased’s estate would treat the ownership interest in the building as an arm’s length investment and would effectively maintain that interest until the other owner had sufficient funds to acquire the interest, or alternatively, the entire property was sold to a third party.
3. The above approach is predicated on the assumption that the super fund of the exiting principal otherwise has sufficient assets to pay the death benefit.
4. A second alternative is for each principal to self-own insurance to pay out any debt referable to ‘their’ interest in the underlying property, noting that practically any such insurance must be held outside the superannuation funds. This is because if it is owned via the super fund, the insurance proceeds are simply added on receipt to the exiting member’s entitlements that must be paid as a lump sum or pension (and can therefore not be used to help reduce debt).
5. If this approach is adopted, the succession arrangements can proceed essentially along the same lines as set out above, or the estate of the deceased principal can acquire an interest in the property using the insurance proceeds (and triggering the potential tax and stamp duty consequences on the sale).
6. Finally, each principal can obtain sufficient insurance to clear the entire debt. The buy-sell arrangement would require that 50% of the proceeds are paid to each principal (or their estate). The underlying property can then be dealt with as set out above, or alternatively, steps can also be taken to ensure that the relevant share of the property is transferred to the surviving principal’s benefit.
7. This last pathway is often used in business succession arrangements and is referred to as the ‘hybrid’ approach (see previous View posts explaining the model). This said, the involvement of superannuation funds does create additional, potentially significant, complications.

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 Regurgitator song ‘Modern Life’.

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Love ya, love ya, love ya** - and my last will proves it … (AKA dogs are the best people**)

The general position under Australian law is that a willmaker has autonomy to distribute personally owned assets in their absolute discretion.

Previous posts have explored the broad exceptions to this position, each of which primarily revolve around either:

1. The underlying incapacity of the willmaker to understand and act freely in preparing their will; or
2. Due to the public policy reasons developed by the legal system that regulate how a responsible willmaker should distribute their wealth.

In this context there are many (in)famous examples often raised by advisers with us of willmakers perhaps taking their autonomy to interesting extremes.

Five examples include:

1. An alleged will precedent provision used by some law firms, that the gift of an estate by a willmaker 100% to his 2nd wife is entirely dependent on a condition hardwired into the will that she remarries. Why the condition of remarriage? In the words of the willmaker: ‘So that at least one man (or woman as the case may be) mourns my death’ … a concept allegedly based on the precedent of the will made by German poet Heinrich ‘Henry’ Heine.
2. The William Shakespeare model of giving to his wife of 34 years and mother of his children Anne Hathaway only one asset from his estate; being his ‘second best bed’. At least according to Wikipedia however, the gift may not appear as harsh as might otherwise be assumed. In particular, at the time beds were very expensive assets, sometimes equivalent in value to a small house. Furthermore, it was also custom that the best bed in the house was reserved for guests. Thus the bed that Shakespeare gifted Hathaway may have in fact been their marital bed, and thus not intended to insult her.
3. Lang Hancock’s business partner Peter Wright had a son (Michael Wright) who created an estate plan to ‘manage’ his obligations to a ‘secret’ daughter from a brief relationship. While the daughter was given a gift of around $3M (challenged successfully to an increased amount of around $6M) much debate was caused by the housing of the gift. This was because the gift was placed into a restrictive trust that mandated rules such as spending limits and the permissible religious faith she adhered to, as well as prohibiting indulging in illegal drugs or committing drug related offences, including driving under the influence of alcohol. Following the challenge these restrictions were all removed.
4. The ‘leaving it all to the cat home’ approach – perhaps most famously adopted by hotel magnate Leona Helmsley, who died in 2007 and left instructions that almost her entire estate of some $8B pass to a trust for dog welfare. The dog trust was the iterated version of the estate plan – the preceding approach prioritised providing for ‘poor people’ as well as dogs, with the dogs noted as a secondary priority. Three years before death however all references to poor people were removed by Helmsley, leaving dogs as the sole beneficiaries of her wealth. Reports at the time also confirmed that Helmsley's nine-year-old Maltese (‘Trouble’) received $12m. By comparison, two of her grandchildren were excluded from the will and two others had their combined $10m inheritance made contingent on their regular attendance at their father's grave. Trouble's inheritance was ultimately cut by the courts from $12m to $2m, with the balance gifted to Helmsley's charitable foundation.
5. Robert Holmes a Court approach of ‘the will you have when you don’t have a will’. Australia’s first billionaire allegedly had completed an extensive estate planning exercise and then managed to carry his unexecuted will in his brief case for around 2 years before his sudden death of a heart attack, aged 53. Dying without a valid will meant that the estate was administered under the intestacy regime – however it was also bitterly litigated in a dispute that lasted years.

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

** For the trainspotters a double hit this week - some extra love for Valentine’s Day 2023. First, the title of today's post is riffed from the Dave Graney and the Coral Snakes song ‘Night of the Wolverine’.

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And the second hit - The Fauves song ‘Dogs are the best people’.