Michele Davis, Head of Succession & Elder Law at Wilson Lawyers, discusses the recent Victorian Supreme Court decision in Re Marsella; Marsella v Wareham (No 2). This case is an important consideration for anyone who might be a trustee of a discretionary trust (including SMSFs) and, those who are considering the succession planning of those types of discretionary vehicles that are commonly utilised today, she writes. Michele will be Chair at the 12th Annual Wills and Estates Symposium on Thursday, 14 March.
There is certainly no question that superannuation is a complex beast. Add to that the self-managed superannuation fund (SMSF) variety and it will keep you busy, with its complex twists and turns, for days.
I read a case recently that is no different. A shout-out to a fellow nerd, Clifford Hughes, for bringing this case to my attention (although I remain uncertain how this one slipped past me!).
In Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65, the Court was called upon to make a determination whether an SMSF Trustee exercised its discretion appropriately and, if not, whether it should then be removed as trustee. By way of background, the estate had earlier been through a family provision claim brought by the deceased’s surviving husband where he was ordered further provision of a ‘flexible’ life interest in the deceased’s family home along with a legacy of $100,000. If you’re interested, you can read the family provision case here.
In this case, the deceased was survived by her second husband and her two children from her first marriage. The deceased was a widow when she met her second husband they were married for 32 years before her death in 2016.
During her lifetime, the deceased had established a sole member SMSF of which she and her daughter were individual co-trustees. The deceased had left an earlier binding death benefit nomination, however at the date of death, the binding nomination had lapsed. Accordingly, no valid nomination was in place at the deceased’s date of death.
Pursuant to the SMSF Deed, the surviving trustee appointed her husband as a co-trustee and on the same day elected to exercise their discretion, as trustees, to pay the death benefits of approximately $450,416 to herself as the dependent of the deceased.
The deceased’s surviving husband brought a claim against the the daughter and her husband, as co-trustees of the SMSF on the basis that the daughter and her husband did not exercise their discretion as the trustee of the SMSF in ‘good faith, upon real and genuine consideration and for a proper purpose’ and that they acted in conflict with their duties as trustees.
The Court noted that there had been a significant relationship breakdown between the surviving husband and the deceased’s daughter shortly after the deceased’s passing. Further, the Court noted that it had been further broken down by the dispute arising between the parties both in the context of the family provision application and this application to the court regarding the daughter’s decision as SMSF Trustee.
The Court determined to set aside the decision by the SMSF Trustee to pay the death benefits to herself as a dependent of the fund. Further, the Court also determined to remove the daughter and her husband, as SMSF co-trustees and invited the surviving husband to submit his suggestions for an alternative SMSF trustee/s. In the context of the decision, the Court referred to the daughter as the primary person responsible for the exercise of the discretion.
In reaching the decision, the Court considered that the relevant factors for consideration included the intention of the deceased as the creator of the fund, the relationship between the deceased and the dependant, and the financial circumstances and needs of the dependants. At paragraph 52 of the judgement, the Court said:
“… Even assuming that the defendant’s position that the deceased did not intend the plaintiff to benefit from the fund is correct, ignoring the plaintiff’s substantial relationship with the deceased and relatively limited financial circumstances, demonstrates a failure of the first defendant to take into account a relevant consideration. Further, the fact that no distribution was made to Mr Swanson [the other biological child of the deceased] is inconsistent with the defendant’s own submissions regarding the deceased’s intention to benefit her children and grandchildren.”
Further at paragraph 56, the Court commented on the conduct of the daughter in respect of the process by which she administered the SMSF and in exercise of her discretion:
“On balance, the inference to be drawn from the evidence is that the first defendant acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties. She acted in the context of uncertainty, misapprehension as to the identity of a beneficiary, her duties as trustee, and her position of conflict. As such, she was not in a position to give real and genuine consideration to the interests of the dependants. This conclusion is supported by the outcome of the exercise of the discretion.
“The ill-informed arbitrariness with which the first defendant approached her duties also amounts to bad faith. The dismissive tenor of the correspondence from Hill Legal, the willingness to proceed with the appointment and distribution in the context of uncertainties and significant conflict and the lack of specialist advice despite the recommendation of Mr Hayes, all support the conclusions that her conduct was beyond ‘mere carelessness’ or ‘honest blundering’. This conclusion is reached without reference to the lack of evidence deposed by the defendants personally.”
Noting the position of the daughter’s husband in all this, the Court said that his position was less certain but could not conclude that he acted under the same advice as his wife had received (from her advisors). However, the Court noted, at paragraph 58:
“However, three factors raise the suspicion that the second defendant did not exercise the power upon real and genuine consideration:
(a) he agreed to be appointed as co-trustee despite his position of conflict and the significant acrimony between the parties;
(b) he distributed the proceeds of the fund on the same day as he was appointed co-trustee; and
(c) the outcome of the exercise of distribution is grotesquely unreasonable.”
The Court ultimately found that the daughter’s husband had also acted in a position of conflict as the husband of the dependent who received the benefits of the fund.
Speaking to whether or not the exercise of the discretion was for an ‘improper purpose’, at paragraph 64 of the judgement, the Court said:
“Evidence of anger or resentment is not sufficient by itself to establish fraud on the power. The plaintiff also points to the timing of the distribution, two weeks before mediation in the Part IV proceeding, and the outcome of the resolution. However, the evidence does not support an inference that any improper purpose associated with the conflict between the first defendant and the plaintiff was the ‘operative or actuating purpose’ in distributing the fund. In summary, it is apparent that the first defendant acted arbitrarily, in the sense that she persisted in the face of uncertainties and significant conflict, and acted without real and genuine consideration. However, it is unclear whether such arbitrariness and lack of consideration was on account of her personal animosity toward the plaintiff or that the fund needed to be distributed as soon as practicable.”
In conclusion, at paragraph 78-79, the Court said:
“The defendants exercised the discretion afforded to them in clause 51.4(b) without real and genuine consideration to the interests of the defendants of the fund and the exercise of discretion is set aside.
In the context of an improper exercise of discretion, and significant personal acrimony between the first defendant and plaintiff, the defendants are to be removed as trustees of the fund.”
This case is an important consideration for anyone who may be a trustee of a discretionary trust (including SMSFs) and those who are considering the succession planning of those types of discretionary vehicles that are commonly utilised today. While the powers of a trustee are discretionary in such a vehicle, those decisions must be considered carefully in light of cases such as these. If there is a disingenuous approach to the exercise of discretion, that alone can be cause for concern that an aggrieved potential beneficiary could bring this matter to a head. This case is also a reminder of the invaluable nature of a binding death benefit nomination. It is essential to obtain expert advice to navigate the complexities of trusts; this is particularly so when speaking of SMSFs where there can be many other factors at play after the loss of a loved one.
You can read the case here.
Michele Davis is the Head of Succession & Elder Law at Wilson Lawyers and a self-confessed succession nerd. Michele focuses her practice on estate planning, deceased estate administration, estate disputes and advises on a range of elder law services, including retirement villages, aged care accommodation and family agreements. Michele is the founder of the very successful Australian Succession & Elder Lawyers LinkedIn Group that now boasts over 1,300 members across the country. Recognised by her colleagues in the profession as an ambassador for all things succession and elder law, Michele maintains a blog devoted to her passion, comprising the latest case updates from across the country. Michele has a Masters of Applied Law specialising in Wills & Estates and consults to the College of Law for the Wills & Estates education courses. Michele also volunteers her time as a Committee Member of the Queensland Law Society’s Succession Law Committee. Contact Michele at mdavis@wilsonlawyers.net.au or connect via Twitter or LinkedIn.