Trustees must take great care when distributing death benefits: lessons from the Court of Appeal

In a recent decision, the Court of Appeal upheld a decision of the Victorian Supreme Court (a summary of which can be found in our earlier article here) and found that the trustees of a self-managed superannuation fund (SMSF) failed to give real and genuine consideration when distributing the deceased's death benefit.

This article outlines:

• a brief summary of the facts and decision in Wareham v Marsella [2020] VSCA 92;
• practical implications of the case for SMSF trustees; and
• lessons for superannuation members and trustees.

Summary

The facts are neatly set out in our earlier article here.

In short, the deceased was a member and trustee of her SMSF with her daughter.

After the deceased's death, the daughter appointed her husband as joint trustee, and promptly paid the entire death benefit of her mother, to herself.

The deceased's second husband was unhappy with that decision. Yet there was no binding death benefit nomination in place, so the SMSF's trustee was free to exercise its discretion in deciding to whom to pay the death benefit.

This was because the trust deed gave the trustees absolute and unfettered discretion as to who should receive the death benefit, and did not require the trustees to give reasons for any decision they made in determining how the death benefit should be paid.

It was on this basis that the trustees determined to pay the whole death benefit to the deceased's daughter.

However, the Victorian Supreme Court ordered that the trustees' decision should be set aside and the trustees should be removed from office. Now the daughter was unhappy: so she appealed to the Victorian Court of Appeal.

The Victorian Court of Appeal, did not change the decision. It found that:

• the trustees did not have a proper understanding of their duties under the superannuation trust deed; and
• all SMSF trustees must exercise good faith when exercising discretions, and that this obligation is unaffected by the fact that the trustee may be an eligible beneficiary under the superannuation trust deed: in this case, the trustees did not meet this obligation to exercise discretions in good faith.

The Court of Appeal held that even though it may have been the intention of the deceased to distribute her death benefit in the way the trustees had, this is not relevant where trustees have failed to give real and genuine consideration to all relevant matters in making their decision.

Practical implications for trustees

This case has significant practical implications for SMSF trustees.

Trustees must ensure they comply with the superannuation trust deed regarding:

• notification requirements to potential beneficiaries;
• affording all potential beneficiaries an opportunity to be considered under the deed; and
• giving real and genuine consideration to the beneficiaries' claim of entitlement to any benefits to be paid out of the fund, and to their surrounding circumstances, before they make their decision.

Therefore, it is essential that trustees understand and interpret the trust deed correctly and clearly show that they have exercised real and genuine consideration when making a determination as to how to make a distribution.

If they fail to do so, they may not only have their decision set aside, but in particularly egregious cases, they can be removed as trustees.

Lessons for superannuation members and trustees

This case emphasises the risk that your wishes may be overridden if a member does not have a valid death benefit nomination, or similar document (such as a Cleardocs death benefit agreement) in place.

If a member does not wish to leave the distribution of death benefits to the discretion of the trustee or trustees, it is essential that the member makes a valid binding death benefit nomination or agreement which directs the trustees how to distribute funds to beneficiaries.

Furthermore, depending on the provisions of the SMSF's trust deed and the terms of the nomination, nominations may lapse after 3 years: trustees and members should ensure all nominations remain current and binding. You may purchase a death benefit nomination or death benefit agreement through Cleardocs.

More information from Maddocks

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