Trustee discretion when paying death benefits may be beneficial where the trustee can make a decision with a fuller understanding of the circumstances of the potential beneficiaries at the death of the testator; circumstances that the testator may not have considered when implementing their estate plan.

The fiduciary nature of the trustee relationship, however, means that a trustee is held to a considerably high standard when deciding who is to receive death benefits.

The decision in Marsella v Wareham (No 2) [2019][1] and the subsequent appeal; Wareham v Marsella [2020][2], which confirmed the decision, advises a trustee, in exercising their discretion, must do so ‘in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred.’ [at paragraph 35].

The Facts 

The deceased was the sole member of a self-managed superannuation fund (SMSF). She had two children from a prior relationship and a second husband whom she had been married to for some three decades.

Prior to death, the deceased was the trustee of the SMSF in her individual capacity alongside her daughter. The terms of the deceased’s Will appointed her husband as executor of the estate.

The deceased had made a binding death benefit nomination directing that upon her death, the proceeds of her SMSF were to be paid directly to her grandchildren.

This nomination was not valid as her grandchildren did not fall into a category of superannuation dependents in accordance with the Superannuation Industry (Supervision) Act 1993 (Cth)[3]. The payment of proceeds from the fund, therefore, fell to the discretion of the trustee.

The daughter of the deceased, as surviving trustee, appointed her husband as the second trustee of the fund. The trustees decided to pay the fund’s proceeds in full to the daughter of the deceased – the remaining potential beneficiaries did not receive a portion of the fund.

What is a trustee required to do in order to correctly pay death benefits from an SMSF?

The Court set aside the trustee’s decision to pay the proceeds in full to herself. They also removed her as trustee of the fund. In making their determination, the Court noted the trustee must act ‘in good faith, upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred’. [at paragraph 35].

The Court held, this includes:

  1. understanding the terms of the trust deed(s);
  2. ensuring the matters and information considered in making a determination is legally and factually correct;
  3. exercising their powers in the best interests of the beneficiaries – which, where the trustee is also a potential beneficiary, requires them to take considerable care in ensuring issues of conflict are appropriately addressed; and
  4. obtaining legal advice from a legal adviser who specialises in superannuation and trust law.

Obtaining specialist legal advice was found to be particularly important, as there are considerable complexities in superannuation law that do not exist in other legal and accounting spaces.

Conclusions 

If you are the trustee of an SMSF and are required to exercise your discretion to determine the payment of death benefits, ensure that you obtain legal advice from a lawyer who specialises in superannuation and trust law. The advice you receive needs to be clear and transparent to ensure that you understand your obligations and fulfil your duties as trustee of an SMSF.

The team at Chamberlains Law Firm can assist you with such advice.

[1] Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65.
[2] Wareham v Marsella [2020] VSCA 92.
[3] Superannuation Industry (Supervision) Act 1993 (Cth) s 10.

 

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