Court removes SMSF trustees after resolved to distribute death benefit to one of them

The Supreme Court of Victoria, in Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65, on 15 February 2019, handed down its decision to remove the trustees of an SMSF. The case involved the death of an SMSF's sole member, Mrs Helen Marsella, who was trustee with her daughter, Caroline. On her mums death, Caroline appointed her husband as the additional trustee, and the two of them (as the SMSF's trustees), resolved to distribute all of the mum's death benefit to her daughter, Caroline. Mum's husband, and her son, were not pleased with that result.

This case is a reminder of the importance of having a death benefit agreement so that a member's surviving trustee does not have sole discretion in deciding how to distribute their benefits upon their death. It's also a cautionary tale that if you are going to execute discretion in your own favour as trustee, you need to be particularly careful about the process you follow.

 

Facts

The deceased was the sole-member of the SMSF and left a death benefit of $450,416 for the trustees to deal with since the deceased did not have a valid binding death benefit at the time of death.

Mum, together with her daughter, were co-trustees of the SMSF. She proposed as sole trustee to make the distribution to herself. The daughter's lawyer advised her that two trustees were needed in order for the fund to comply with super law - and therefore she needed to appoint an additional trustee to validly make the distribution[1]. After receiving the advice, the daughter appointed her husband as co-trustee and on the same day as making the appointment, made a distribution of the entire $450,416 death benefit to herself.

The plaintiff was the deceased's husband of 32 years and executor of her estate. The Husband initiated legal proceedings to remove the trustees.

In deciding how to make the distribution, the trustees did not take into account possible dependants. Accordingly, the Court held that the trustees should be removed in this instance as they acted arbitrarily without regard to the trust deed or interests of dependants.

Power to distribute benefits

The Court was required to determine whether the trustees:

  • properly exercised their discretion to distribute the fund's proceeds;
  • exercised their power in good faith, giving real and genuine consideration to the purpose for which the power was conferred; and
  • should be removed.

Under clause 51.4(b) of the SMSF's deed the trustee has discretion as to how to distribute the deceased member's benefits.

The Court stated that while a trust deed can afford the trustee discretion in exercising its duties, the power needs to be exercised in 'good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred'.

Good faith

In considering whether the trustees acted in good faith, consideration is given to the enquiries made by the trustees, the information held by the trustees, reasons for exercise of their discretion in a particular away and whether consideration is given to any gaps in information. Lack of good faith includes a refusal to take into account relevant considerations.

The Court stated that the deceased's daughter, as sole-trustee at the time, failed to obtain proper specialist advice (after recommendations from her accountant) to resolve the uncertainty surrounding the fund deed in the context of a significant financial decision — i.e. distributing the $450,416. The daughter acted "arbitrarily" in distributing the amount, with ignorance of her duties. She did not give real and genuine consideration to the interests of dependants — this was supported by the outcome of the resolution to distribute the benefits to herself.

The Court also found that the conduct amounted to acting in bad faith given the significant conflict and lack of specialist advice obtained by the daughter.

The Court also found that the daughter's husband, who was co-trustee, also acted in breach of his duty to avoid a conflict of interest by resolving to exercise his discretion under clause 51.4(b) of the fund's deed in favour of his wife.

Exercise of discretion for proper purpose

The purpose for which the power is exercised is a question of fact to be decided on the evidence of each matter and must be inferred from the trust deed.

In this instance, the Court was not satisfied that the power was exercised for an improper purpose. This was despite the Court finding that the trustees acted in bad faith.

Trustees to be removed

In considering whether to remove trustees, the primary consideration is that of the welfare of beneficiaries. Amongst other factors, consideration is also given to the faithful and sound exercise of powers which are conferred upon the trustee. Ultimately, whether the Court decides to remove a trustee rests on the facts of each case.

In these circumstances, the Court found that the trustees should be removed given that:

  • they failed to give real and genuine consideration to the interests of dependants and therefore failed to exercise the discretion afforded to them under clause 51.4(b) of the fund's deed;
  • the entire property of the trust was dealt with arbitrarily by distributing the assets to the daughter; and
  • this was done in the context of a substantial personal conflict with the plaintiff having regard to their relationship breakdown after the death of the sole-member.

Death benefit agreements

It is important to keep in mind the benefits of preparing a Death Benefit Agreement or Death Benefit Nomination for SMSF members. Such documents express a member's clear intention as to how their benefits are dealt with in the event of their death. Without these documents, death benefits are dealt with as directed in the SMSF's deed and sometimes result in distributions by surviving trustees which do not reflect the intention of the deceased member.

Trustees need to give careful thought before exercising discretion in their favour. It is worth observing that had the trustees followed a careful and deliberate process, and evidenced that process, then the Court would likely not have had any opportunity to challenge the daughter's decision to pay all benefits to herself. She didn't, and so the Court not only invalidated the decision, but also took the opportunity to remove the trustees.

More information from Maddocks

For more information, contact Maddocks on (03) 9258 3555 and ask to speak to a member of the Commercial team.

More Cleardocs information on related topics

You can read earlier ClearLaw articles on a range of topics, such as:

Order related document packages


[1] In order for the fund to be compliant with section 17A of the SIS Act the SMSF requires 2 individual trustees.