The case of Marsella -v- Wareham (Marsella) was handed down by the Full Court of the Supreme Court of Victoria on 20 April last. The decision is a salient reminder to advisers and clients of not only the consequences when a binding death benefit nomination becomes non-binding, but what steps a trustee in this position has to take when it exercises a discretion to pay a deceased member’s death benefits.
There are a number of circumstances when a Binding death benefit nomination can become non binding or where a trustee is left with a discretion to pay superannuation benefits on the death of a member with the legal pitfalls that await them, as Marsella indicates:
- Paying a death benefit to a non SIS dependant (1);
- The form of nomination does not comply with the rules of the Fund (2)
- Problems or errors with trust deed upgrades or change of trustee (3)
- A nomination that is not stepped or cascading and the nominated beneficiary predeceases the Member;
- A binding nomination that has lapsed;
- The payment of an excess transfer balance from a reversionary pension where there is no binding death benefit nomination regulating that excess.
The facts in Marsella in review
Helen Swanson established an SMSF in 2003 in which she was the sole Member. She died in April 2016 and at the time of her death, she and her daughter Mrs Wareham were the trustees of the Fund. At the time of her death Mrs Swanson was survived by her second husband, Rick Marsella, Mrs Wareham and her son Charles Swanson. In her Will, she appointed Mr Marsella as Executor and granted a life interest in a property in Mornington for Mr Marsella until his death, with the balance of her estate passing to her surviving daughter and son. The value of Mrs Swanson’s death benefits were approximately $450,000.
In 2003 Mrs Swanson made a lapsing binding death benefit nomination, nominating her grandchildren as beneficiaries. At the time of her death, that death benefit nomination had not been renewed.
In October 2016 Mr Marsella commenced proceedings seeking further provision from Mrs Swanson’s estate (Part IV claim). At that point in time, the death benefits had not been paid out. However, in April 2017, the Fund’s accountant advised Mrs Wareham that the Fund would lose its complying status and potentially incur tax penalties unless the death benefits were paid out as soon as possible. He advised Mrs Wareham that she needed to consider the interests of all of her mother’s dependants and that she should obtain specialist advice. Mrs Wareham advised her accountant that she would consider all of her mother’s dependants as defined by the trust deed and her mother’s wishes, as stated in the May 2003 binding death benefit nomination form.
The solicitors for Mrs Wareham prepared the trustee minutes for the payment of the death benefits that were dated 17 April 2017. In fact, two sets of minutes were prepared, one involving the appointment of Mrs Wareham’s husband as Co-trustee. This was done because of the requirements of the trust deed which required the office of trustee to be held by two or more trustees. Both minutes resolved to pay Mrs Swanson’s death benefits to Mrs Wareham.
The Supreme Court of Victoria decided that it would deal with Mr Marsella’s Part IV claim first. In its judgement the Court granted Mr Marsella a “flexible life interest” in another larger property owned by the deceased in Frankston, together with a pecuniary legacy of $100,000.
In a separate proceeding relating to the super benefits, Mr Marsella sought orders that Mrs Wareham be removed as trustee of the Fund and challenged the payment of the death benefits.
The first decision of the Court
What the Court decided, was that while Mrs Wareham fell within the class of objects or beneficiaries of the super Fund, the power of distribution under the Fund’s deed was a “special power” and did not negate her duty to exercise that power “in good faith upon real and genuine consideration and for the purposes for which it was conferred”, referring to an earlier 1984 case of Karger-v- Paul.
Under the principles of Karger-v- Paul, a court is not obliged to investigate the fairness or reasonableness of the outcome of the exercise of a trustee discretion, particularly in circumstances where a trustee does not give reasons for its decision and is not bound or obliged to give such reasons. In the Marsella case, Mrs Wareham chose not to give reasons for the exercise of her discretion to pay the death benefits to herself, relying on the principles of Karger-v- Paul.
What the trial judge decided was that the distribution of the entire amount of the death benefits held in the Fund to Mrs Wareham supported the conclusion that there was a lack of real and genuine consideration. In coming to this decision, the Court drew upon various inferences from the limited amount of evidence that was produced. The Court decided that the outcome itself, which was held to be “grotesquely unreasonable”, constituted evidence that the discretion was not exercised “upon real and genuine consideration” or that it was exercised in bad faith. The judge said that the trustee had ignored Mr Marsella’s substantial relationship with Mrs Swanson and relatively limited financial circumstances, that the trustee resolutions were “formulaic” and that the trustee had not obtained specialist advice. The Court also drew reference to a particular letter from the trustee’s solicitors to Mr Marsella’s solicitors which contended that he was not a beneficiary of the Fund. From this letter alone, the Court said that there was a misapprehension on the part of the trustee to identify Mr Marsella as a potential beneficiary and that she had made her decision with “ill informed arbitrariness” in her duties as trustee which amounted to bad faith. The Court did, however, agree that the purpose for the exercise of the discretion was not improper.
The Court also referenced from the Part IV proceeding that the parties were in conflict, referring to an alleged altercation at the home of Mr Marsella following Mrs Swanson’s death.
What was challenged on appeal
What was argued on appeal was that the trial judge was in error. There were 10 grounds of appeal lodged. It was argued that there was no evidence that the trustee had failed to give real and genuine consideration to the exercise of her discretion. That at its highest, all that could be inferred, based on one item of correspondence, was that the trustee had acted on incorrect legal advice but that correspondence occurred after the trustee decision was made and was written to another party in an ongoing litigious dispute, rather than as advice to the trustee. It was said that the trustee minutes and resolutions included the definition of “dependant” and acknowledged that the estate was a potential beneficiary of the death benefit. Therefore the trustee did not act on any misunderstanding.
It was further submitted, based on the evidence of the accountant, that the trustee had both acted on legal advice and on the advice of the accountant himself.
It was also argued that based on the objective evidence, the deceased did not want any part of the death benefits being paid to Mr Marsella, because of the appointment of Mrs Wareham as trustee and the signing of a death benefit nomination in favour of her grandchildren. It was also said that the trust deed contemplated a position of conflict because it envisaged that as Mrs Wareham as trustee, was also Superannuation dependant. As such she could appoint herself as the recipient of the death benefit and that the no-conflict rule of the trustee was waived in these circumstances, relying on a recent case of Blenkinsop-v- Herbert.
What the Court of appeal has now said
In rejecting the appeal, the Full Court of the Supreme Court made the following findings:
- The Court relied on one particular letter in the course of the litigation that, in its opinion, identified that the trustee had not considered whether Mr Marsella was a beneficiary to be considered in the payment of the death benefits. While it was argued that this letter occurred after the decision of the trustee and was part of the correspondence between the solicitors for the parties, the Court linked the contents of the letter with the death benefit resolutions which did not specifically mention Mr Marsella. This is notwithstanding the existence of previous case law that has held that no adverse inference should be drawn from a trustee who is not obliged to give reasons for its decision.
- On this basis, it was said that the trustee had failed to give real and genuine consideration to the interests of Mr Marsella. The Full Court did not challenge the trial judge’s view that the outcome of the trustee’s decision in paying all of the superannuation benefits to Mrs Wareham supported the conclusion that the trustee did not give real and genuine consideration. It said that it did not have reason to doubt the proposition that “a grossly unreasonable result may be evidence of a miscarriage of duty”.
- That the principles in Karger-v- Paul do apply to SMSFs, but the Court left open the question of whether trustees have to properly inform themselves before making a decision in paying death benefits. It said that the 2010 High Court case of Finch -v- Telstra super did not distinguish between corporate, retail industry funds on the one hand and self-managed super funds on the other and that issue was not one that it had to decide upon.
- The fact that the purported binding nomination left no benefits to Mr Marsella and that there may have been good grounds for the discretion not to be exercised in favour Mr Marsella is irrelevant to the question of whether the trustee properly exercised their discretion to give real and genuine consideration as part of their function.
- That while a trust deed may contemplate a trustee being in a conflict by also being a potential death benefit dependent, there is a distinction between a potential conflict and an actual conflict concerning the distribution of the death benefits.
- In relation to the power of appointment specified in the trust deed, the Court agreed with the trial judge that the power in the trust deed was a ‘’special power” which required the trustee to choose among an identified class of potential beneficiaries. This is different from a general power of appointment where an Appointor has virtually equivalent rights of ownership.
- A trustees discretion, even if it is unfettered and absolute, can be set aside without requiring evidence of bad faith if there is no evidence of real and genuine consideration being given to the interests of all potential beneficiaries.
- On the question of removal of the trustee, it was decided that even if the trustee reconsidered its position, the interest of all potential beneficiaries might not be given proper consideration and that the trustee may simply reinstate the decision that it made.
What lessons can be learnt for advisers and clients managing SMSF’s
The initial decision and the Court of Appeal’s decision in the Marscella case leave open a number of disturbing and potentially difficult outcomes for trustees when exercising decisions not only in the SMSF arena but in relation to all discretionary trusts in Australia. The following issues from the case arise for clients and advisers to consider:-
- A trustee’s decision could be challenged, if there is evidence of conflict between the trustee and the beneficiary that could amount to either bad faith or the failure on the part of the trustee to give real and genuine consideration to the interests of that beneficiary and, particularly, if there is no distribution to that beneficiary;
- The Marsella case supports the view that specialist SMSF advice should be obtained, recorded and properly documented, potentially to be put into evidence where a trustee has to exercise a discretion. This is especially so for SMSFs and possibly for discretionary trusts. Such advice may also be required as to whether the trustee should or should not give reasons for its decision in circumstances where a potential beneficiary does not receive a benefit. If no reasons are given, a court will look for or imply any failure particularly if it paid to one beneficiary.
- While not decided, it would seem to be prudent that trustees have to actively make and be seen to making enquiries about a potential beneficiaries needs and resources in order to demonstrate that they have given real and genuine consideration before deciding on the payment of any death benefit where a discretion has to be exercised. This is where specialist advice is critical to this process as it will be difficult for a trustee to be criticised if they follow that advice (4)
Overall, the case reminds advisers and clients more than ever, of the importance of having all their documents in order to provide certainty in relation to what happens to a member’s super benefits on death. Invalidly prepared documents or chain of documents can render what is intended to be a binding nomination, non-binding with the risks of a trustee being forced into a situation like Marsella and this is particularly critical for blended families or families in conflict.
(1) re Narumon Pty Ltd  QSC 185
(2) see Donovan –v- Donovan  QSC 26; Munro -v- Munro  QSC 61; Cantor Management-v- Booth  SASCFC 122; and Hill-v-The Holly super fund:  WASC 89
(3) see: Perry-v- Nicholson QSC 163
(4) see Ioppolo & Hesford-v- Conti  WASC 389 at para 79,80