Background
As many of our readers will be aware, trustees of superannuation funds have significant power. An example of this power occurs where there is no valid or effective Binding Death Benefit Nomination (‘BDBN’) completed by the member. In this case, trustees will usually have broad discretion as to whom a member’s death benefits are paid.
The recent Victorian Supreme Court case of Re Marsella tested the exercise of trustee discretion when paying death benefits from superannuation. Read on….
The Facts
Helen Marsella had two children – Caroline and Charles – from her first marriage. Helen remarried Riccardo Marsella in 1984. Helen and Riccardo lived together at a property in Frankston.
In 2003 Helen established a self -managed superannuation fund – the Swanson Superannuation Fund. Helen was the only member. Helen and her daughter Caroline were trustees. Helen completed a Death Benefit Nomination in 2003, but this nomination had expired. It also purported to direct the death benefits to Helen’s grandchildren, who were not her dependants. There was no other written nomination made by Helen.
Helen died on 27 April 2016. She was survived by her husband Riccardo and her children Caroline and Charles. Helen and Riccardo had been married for 32 years. However, following Helen’s death the relationship between Caroline and Riccardo became strained.
On 17 April 2017, almost one year after Helen’s death Caroline, as ‘surviving trustee’ resolved to pay Helen’s entire death benefit to herself. On the same day Caroline purportedly appointed her husband Martin as second trustee.
Riccardo, who was the executor of Helen’s Will, commenced legal action. Amongst other things, he sought the removal of Caroline and Martin as trustees. He also attacked the decision made by the trustees to distribute the proceeds of the fund (approximately $490,000) to Caroline.
The trustees asserted that the trust deed of the Swanson Superannuation Fund gave them an absolute and unfettered discretion to make the death benefit payment to Caroline. Riccardo’s position was that the trustees did not exercise good faith and genuine consideration in relation to the dependants of the deceased and that the death benefit payment decision should be set aside.
The Decision
Justice McMillan decided that the trustees had a duty to exercise their power of distribution under the trust deed in good faith, upon real and genuine consideration and for the purposes for which the power was conferred. The Court highlighted the difficulties in the relationship between Caroline and Riccardo. It noted that the outcome of Caroline and Martin’s exercise of discretion (i.e .the distribution of the entire proceeds of the fund to Caroline) suggested that there was a lack of real and genuine consideration on the part of the trustees.
The position of the Court was that Caroline acted arbitrarily in distributing the death benefit ‘with ignorance of, or insolence toward, her duties’. She did not familiarise herself with the trust deed or take specialist advice. The ‘ill-informed arbitrariness’ with which she approached her trustee duties also amounted to bad faith. Justice McMillan inferred that the outcome produced by Caroline and Martin’s decision was ‘grotesquely unreasonable’.
For these reasons the trustees exercise of discretion in relation to payment of the death benefit was set aside and Caroline and Martin were removed as trustees. Before this case was heard, Riccardo’s lawyers obtained a personal undertaking from Caroline that the funds would not be distributed or disbursed. At a separate hearing, the Court decided to hear an application from Riccardo as to who the new trustee(s) of the Swanson Superannuation Fund should be. The new trustees, once appointed, will presumably reconsider the question of whom should receive Helen’s $490,000 death benefit payment.
The Key Lessons
One key point here is that all of this might have been avoided had Helen taken more care with her Death Benefit Nomination made in 2003. Tens of thousands of dollars in unnecessary legal fees were spent poring over the trustees’ exercise of their discretion. This could have been averted by ensuring that Helen left a valid BDBN. This case highlights the importance of solid succession planning. Control of a self- managed fund after loss of capacity or death of a member is critical.
Another is clearly that, where a court is sufficiently unhappy with a trustee’s exercise of discretion to pay death benefits, it will try to find a way to set such a decision aside. Trustees should ensure that they act in good faith, be aware of conflicts and avoid making ‘grotesquely unreasonable’ decisions.
