The Times They Are A-Changin’?: Equity Rising In Re Marsella: Marsella v Wareham (No 2) (2019) VSC 65

Background

Superannuation is a major asset of many Australians, and consequently, it has a crucial role in effective estate planning. In that context the importance of controlling self-managed superannuation funds (SMSF) is axiomatic.

It has been long accepted that the trustee of a discretionary trust has the discretion to determine when and how to make distributions to a trust’s beneficiaries. However, the Supreme Court of Victoria recently decided to remove two individuals as trustees of an SMSF after determining that they had not appropriately considered the interests of all the dependents of the fund when distributing benefits.

Key Issues

Historically, the Courts have acknowledged the need for trustees to consider the potential beneficiaries in making their decisions. However, it has largely been impossible for an aggrieved beneficiary to challenge the decisions of the trustees.

Key Facts

Compare and contrast, as they say, these two cases with largely similar facts. The first concludes that the trustee had the discretion to pay the superannuation benefits to herself to the exclusion of her brother despite the deceased's wishes. The second case appears to find a role for equity in a quite different outcome.

Katz v Grossman (2005)

In NSW the much discussed 2005 Supreme Court case of Katz v Grossman demonstrated the importance of control over self-managed superannuation funds (SMSF).

In this case, Daniel Katz brought an action against his sister Linda Grossman and her husband Peter Grossman, claiming an interest in their father’s SMSF.

Ervin and Evelin Katz were trustees of their SMSF. Evelin died in 1998 and Ervin appointed his daughter Linda as an additional trustee of the fund. Ervin died in 2003. Linda then appointed her husband as a trustee.

Ervin had made a non-binding nomination of a beneficiary, in which he indicated that he wanted his superannuation benefit to be divided equally between his two children, Daniel and Linda. However, following his death, the SMSF was effectively in the control of the daughter and her husband. Linda and Peter refused to follow the father's non-binding nomination and decided to pay the entire benefit of $1m to Linda.

Consequently, the son did not receive half of the superannuation as intended by the deceased. Daniel challenged the appointment of Linda and Peter as trustees of the fund, but the Court held that both Linda and Peter were validly appointed as trustees and they were able to do as they did however unfair it might seem.

The accepted view has been that, in the absence of a binding death benefit nomination, the trustee of an SMSF has the discretion to determine how a deceased member’s superannuation benefits are to be paid, including the discretion to pay the benefits to themselves. The accepted view has recently received a challenge.

Re Marsella: Marsella v Wareham (No2) (2019)

In this case, the deceased, Helen Marsella, had a husband and two children from a previous relationship. She had been a trustee of an SMSF with her daughter as co-trustee. She did not have a current valid, binding death benefit nomination at the date of death.

Upon the deceased’s death, in April 2016, the daughter became the sole trustee of the fund. At the date of death, the benefit payable was estimated at $450000.The daughter appointed her husband as co-trustee and, in April 2017, decided to distribute the entirety of the deceased’s superannuation benefits to herself to the exclusion of her brother and step-father.

Unsurprisingly, the deceased’s husband challenged the distribution arguing that the decision had been made in “bad faith” and did not consider the needs of eligible beneficiaries.

In contrast to Katz, in Marsella, the court agreed with the deceased's husband and found that the trustees had not acted in good faith. The Court rejected the trustee's submissions that they had full and unfettered discretion in relation to the proposed distribution and ordered the removal of the trustees.

The following judge’s comments summarise the Court’s thinking and suggests the role for equitable considerations:

“While it is not the Court’s role to consider the fairness or reasonableness of the outcome of the exercise of discretion and usurp the role of the trustee, the outcome itself, particularly where the result is grotesquely unreasonable, may form evidence that the discretion was never properly exercised, or was exercised in bad faith.”

The reasoning of the Court, in this case, suggests the law may be changing to consider the lack of good faith in trustee decision-making.

What Does It Mean?

In Marsella the Victorian Supreme Court:

• Decided that the trustees had not given any proper consideration to the interests of the other beneficiaries. Moreover, they had dealt arbitrarily with the fund against a background of personal conflict with Mr Marsella. It was, therefore, wholly appropriate for the trustees to be removed.
• Looked at the exercise of the trustee’s discretion and, in contrast with current practice, seemingly imposed a duty on trustees of SMSFs to exercise good faith, give genuine consideration to eligible recipients, and act fairly towards them.

These cases are a reminder:

• That the decisions are an important consideration for anyone who may be a trustee of a discretionary trust, including SMSFs, and those considering succession planning utilising discretionary vehicles;
• That although the powers of a trustee are discretionary, their decisions must be considered carefully in the light of these cases;
• Of the importance of binding death benefit nominations and highlight the importance of specialist advice being obtained before decisions are made to distribute the income or capital of a trust or death benefits from an SMSF, particularly where a beneficiary is likely to dispute the trustee's decision.

Contact Our Family & Wills Lawyers in Sydney, NSW

Szabo & Associates Solicitors, can offer expert advice on a wide range of legal matters including estate planning, contesting, making or updating a Will, preparing a Power of Attorney and Binding Death Benefit Nominations. Please call George Szabo on (02) 9046 8466 or fill in our online contact form.