The Victorian Court of Appeal decision in Re Marsella; Wareham v Marsella [2020] VSCA 92 follows Justice McMillan’s decision to set aside a distribution of superannuation death benefits for their improper exercise of discretion.
Read our summary of the parties, background of this case and initial decision here.
In the initial decision, Justice McMillan found that the deceased’s daughter, Carol, did not give real and genuine consideration to the potential beneficiaries of the death benefit in deciding to pay her mother’s entire death benefit to herself.
Key lessons
We have summarised some of the key lessons to be taken from this appeal below.
- Emphasis placed on solicitors’ correspondence
Before reaching Court in the first instance, the solicitors acting for each of Carol and the deceased’s husband, Riccardo, exchanged a number of letters attempting to set out their clients’ claims in respect of the death benefit.
The SMSF trustees asserted that such correspondence, which they argued addressed and refuted claims from Riccardo’s lawyer that he was a potential beneficiary was evidence of their real and genuine consideration to their decision to distribute to Carol.
The Court of Appeal found that the correspondence in fact demonstrated the trustees’ deficiency in their understanding of the terms of the fund’s deed. Their Honours stated that it is “scarcely likely that responsible lawyers would write such a letter if they had previously advised their client that Mr Marsella was both a Dependant and a Beneficiary under the terms of the trust deed”. The series of letters essentially demonstrated that the trustees did not properly inform themselves of the terms of the deed, the circumstances or the applicable law.
- Acting in conflict
The trustees claimed that the previous decision was incorrect in that there was no conflict in deciding to pay the death benefit to Carol, asserting that the deceased’s intention for Carol to receive such benefit was inherent in appointing her as the co-trustee of the fund during her lifetime. The argument was predicated on their assumption that in appointing Carol as trustee, it was foreseen that she would solely benefit from the fund and that because of this such conflict was authorised.
The Court of Appeal confirmed that just because a deed contemplates the same individual acting as trustee and potential beneficiary of the fund, does not mean that a conflict of interest is authorised by the deed. An express provision in the deed specifically addressing the conflict of interest would need to be found for this argument to succeed.
In some circumstances, individuals are placed in a position of unavoidable conflict. The deceased may have appointed them as the executor, the replacement trustee of the SMSF and a beneficiary of the estate.
This actual conflict should be carefully considered and the Court has directed trustees to obtain specialist advice to determine how (if at all) the conflict will affect their ability to fulfil their duties.
Individuals who hold different positions even though they are the same person ought to seek independent advice from separate lawyers to advise them in each of these roles.
- “Bad faith” is not the threshold
The Court of Appeal was asked to overturn Justice McMillan’s decision, arguing that failure to give real and genuine consideration alone was not sufficient to conclude that they has not exercised their discretion properly.
The trustees relied on a previous decision which provided that trustee discretion is exercised properly if it is exercised:
– in good faith;
– upon real and genuine consideration; and
– in accordance with the purpose for which the discretion was conferred.
Importantly, however, the Court of Appeal contrasted the facts of this case and the earlier case, and confirmed that it was not necessary for the trustees to have acted in “bad faith” to overturn the exercise of their discretion.
An “absolute” or “unfettered” discretion under a deed cannot be carelessly acted upon by the trustee. It does not preclude the trustee from scrutiny and challenge.
- Take steps in estate plan to avoid the risk of uncertainty after death
Having documentation and structures in place as part of an overall estate plan can assist in providing clarity to executors, trustees and beneficiaries about a deceased’s intentions once they have died.
Binding death benefit nominations are often permitted under deeds for SMSFs. SMSF members direct the trustee where they want their death benefits to be paid – and if properly executed, will displace the trustee’s ability to exercise discretion as to who benefits from death benefits.
Provided the SMSF trustee-member rules and the fund deed are complied with, appointing an independent person to control the fund and exercise the discretions in the fund’s deed after death could also assist in minimising the potential for contests between potential beneficiaries.
- Seek advice before exercising trustee discretion
The terms of a superannuation fund deed differ from fund to fund. Before taking steps to administer the fund, or exercise any discretion available under the deed, it is important to understand the obligations and duties of this role. One of the key takeaways in this appeal decision is that seeking specialist advice is a ‘must’ and reference to the advice should be included in trustee minutes documenting the payment of death benefits.
How we can help
Seeking specialist advice will go a long way in ensuring trustees are aware of what the role requires and will provide trustees with guidance as to how best to fulfill their responsibilities. For further information or guidance, please do not hesitate to contact us.