Distributing Death Benefits in SMSF’s – Trustees must proceed with caution
The Victorian Court of Appeal has recently handed down its decision in Wareham v Marsella  VSCA 92 which has highlighted the need for trustees of SMSF’s to proceed cautiously when resolving to distribute a deceased member’s SMSF benefits in the absence of a valid binding death benefit nomination.
This case involved an SMSF controlled by the Deceased and her daughter, Ms Wareham. Following the deceased’s death, in order to keep the SMSF compliant, Ms Wareham appointed her husband as a second trustee of the SMSF. The trustees obtained legal and accounting advice in relation to the deceased’s death benefits and following this advice, resolved to pay the deceased’s death benefit to Ms Wareham.
Like many SMSF deeds, the trust deed permitted the trustees of the Fund to exercise absolute and unfettered discretion in relation to the payment of the Deceased’s Death Benefits. Most importantly, there was no obligation on the trustees of the Fund to provide reasons for the exercise of their unfettered discretion. The trust deed also contained a conflict of interest clause which recognised that a trustee could also be a potential beneficiary of the fund.
However, the Deceased had also been in a long term second marriage with Mr Marsella. By virtue of his marriage to the deceased, Mr Marsella was a ‘dependant’ for superannuation purposes and a person adversely affected by the trustees decision to pay the deceased’s death benefit entirely to Ms Wareham. He commenced an action in the Supreme Court of Victoria seeking to have the trustee’s resolution set aside and the trustees removed from office. Mr Marsella claimed that the trustees had exercised their discretions in bad faith, in conflict of interest and without any real and genuine consideration of his claim to entitlement.
The Court upheld the decision at first instance and ordered that the trustee’s resolution be set aside and the trustees be removed as trustees of the Fund.
In explaining its reasons for decision, the Court noted the following:
- Even though the trustees had obtained legal and accounting advice, this was not from professionals who specialised in the area of superannuation.
- The trustee’s decision to pay the death benefit to Ms Wareham was based on a failure to give real and genuine consideration to Mr Marsella’s claim to entitlement.
- The mere use of the term ‘dependants’ in the minutes of the trustees, did not infer that they knew the meaning of the word ‘dependants’. Therefore, there was no certainty that all ‘dependants’ had in fact been considered prior to a resolution being passed. Furthermore, there was a risk that, even with proper advice, the trustees would not have properly considered all potential beneficiaries.
- The fact that a trust 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 “absolute” or “unfettered” discretion cannot be carelessly acted upon by a trustee and is not a defence to any scrutiny.
What does this mean for SMSF Trustees?
Where a member dies leaving no valid binding nomination in place, SMSF Trustees are obliged to:
- Obtain specialist legal and accounting advice prior to a distribution of death benefits
- Notify potential beneficiaries in accordance with the terms of the trust deed
- Provide all potential beneficiaries with the right to be considered for distribution of the Deceased’s death benefits, and
- Give “real and genuine consideration” to a beneficiary’s claim for entitlement to the death benefits and their individual circumstances before resolving to pay death benefits. This may involve the trustee making enquiries into the financial circumstance of all potential beneficiaries.
Furthermore, where a trustee is also a potential beneficiary, extreme caution needs to be taken to ensure conflicts of interest are managed appropriately.
Trustees who fail to discharge their obligations risk having their resolutions set aside and being removed as trustees.
How could this situation be avoided?
The above situation could have been entirely avoided had the deceased obtained sound estate planning advice and put in place a valid binding death benefit nomination in favour of Ms Wareham.
For more information or assistance in this area, contact Karolina Rzymkowska, Head of Estates, at Lynn & Brown Lawyers.
Looking for more insight from Lynn.& Brown Lawyers on estate planning? Read about how de facto couples in WA are finally moving towards splitting superannuation, the importance of death benefit nomination, and estate inheritance in blended families.
About the authors:
Karolina Rzymkowska is a Perth Lawyer and Head of Estates at Lynn & Brown Lawyers. Karolina leads the Estates Team and is highly experienced in both simple and complex estate planning, estate administration and disputed estates. Steven is a Perth lawyer and director and has over 20 years’ experience in legal practice and practices in commercial law, dispute resolution and estate planning.