Background

In March 2019 we reported on the Victorian case of Marsella[1] in relation to the exercise of discretion to choose a death benefit beneficiary by a trustee of a self-managed super fund (SMSF). That case was remarkable because it was the first case where a disappointed beneficiary of a deceased estate has been able to have the trustee of the SMSF’s decision not to nominate them over turned.

The case was appealed and the appeal was dismissed in Wareham v Marsella [2020] VSCA 92.

The appeal was lodged on 10 grounds and was an all-out assault on the trial Judge’s decision. Unfortunately for the applicants, the Court of Appeal dismissed all grounds of appeal.

Real and genuine consideration

The Court of Appeal again returned to the seminal case of Karger v Paul and provided a detailed analysis of the reasoning of that case and its decision. Whereas many trust law practitioners would say that Karger v Paul is authority for the fact that a trustee has unfettered and untrammelled discretion, the Court of Appeal’s analysis drew a more nuanced conclusion of the case.  The Court found that it is not necessary to show bad faith on the part of the trustee when appealing the exercise of discretion.  The Court endorsed the principle from the trial Judge that a decision may be overturned on the basis that it is “grotesquely unreasonable”.

Removing the trustee

The Court of Appeal affirmed the trial Judge’s decision to remove Ms Wareham and her husband as trustees for the SMSF. The Court pointed out that there was a real risk that if the trustees were not removed they would simply make the same decision again.  The chief consideration when deciding whether a trustee must be removed is the welfare of the beneficiaries.  The Court noted that the removed trustees had:

  • failed to give the matter real and genuine consideration;
  • then defended their decision at trial and in the Court of Appeal; and
  • had not admitted the possibility of a different outcome for their exercise of their discretion.

Implications and lessons

The Court of Appeal decision is an affirmation of the trial Judge’s decision in all respects.

The outcome of this case means that when an SMSF trustee is exercising discretion to choose a death benefit beneficiary, they need to be careful to ensure that, in a reasonable and documented manner, they exercise real and genuine consideration of all relevant beneficiaries.

This case potentially sets the law on how superannuation death benefits are paid from an SMSF on a different direction to the history of the law to date. Previously we would have been confident in telling you that the trustee of an SMSF is entitled to nominate themselves as the sole beneficiary of the assets of the Fund regardless of any ongoing litigation or any other potential beneficiaries, so long as they complied with the Act and the trust deed.

However, the reasoning from this case suggests the law maybe more similar to that found within family provision cases. The trustee must at least to some degree, act as if in the role of an equity judge assessing a family provision claim and consider the relative merits of each potential beneficiary.  Therefore, the trustee must consider the deceased’s children and spouse, including:

  • their relationship with the deceased;
  • their relationship with the trustee and particularly whether there is any ongoing conflict;
  • the financial circumstances of each potential beneficiary;
  • how the deceased has already provided for the respective beneficiaries under their will or other estate entities such as family trusts; and
  • the potential conflict in the trustee paying themselves.

When circumstances similar to this case arise in the future, i.e. where the trustee is a step-child of a surviving spouse and there is litigation ongoing (which is the common scenario in death benefit dispute cases!), then the very fact that the surviving spouse is not the recipient of the death benefit may itself warrant the removal of the trustee from the Fund. One wonders what would happen if the new trustee of the Fund made the same decision?

If acting for a claimant seeking the superannuation, we now have a powerful new precedent in our litigation toolkit.

Trustees should expect that the exercise of their discretion to choose a death benefit beneficiary (if there is no binding nomination in place) cannot be arbitrary and must, to some demonstrable degree, consider the needs of all beneficiaries who might be eligible to receive the death benefit.

At the end of the day, if someone, in fixing on their estate plan is anxious to ensure that their superannuation death benefit passes in a particular way, it is essential that a binding death benefit nomination be prepared to avoid the implications of the Marsella case.

[1] Marsella v Wareham (No 2) [2019] VSC 65

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