Distribution of death benefit – Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65

This case considers facts so reminiscent of the much discussed Katz v Grossman [2005] NSWSC 934 that comparison must come to mind. The main fact variation being that in this case the contest was between a long standing spouse and a child of the first marriage rather than between siblings. The outcome is completely different.

Ms Marsella was married to Mr Marsella for 32 years, her second marriage. At the time of the marriage her daughter Caroline was aged 12 and her son Charles aged 14. Prior to her death the children had apparently good relationships with their stepfather. In 2003 Ms Marsella caused a self managed superannuation fund (‘SMSF’) to be established of which she was the founder and only member and Caroline was the second trustee. At the time of Ms Marsella’s death in 2016 there was a little over $450,000 in the fund and no valid binding death benefit nomination in place.

Caroline, as the remaining trustee of the SMSF, took advice and promptly distributed the entire death benefit to herself as a dependant of the deceased member. She subsequently appointed her husband as a second trustee and redid the documentation, apparently ‘attempting to cover [alternate] interpretations of the fund deed’’. The widower claimed the death benefit should have been paid to him either as executor or personally and that an independent trustee should be appointed to properly consider the exercise of the discretion and appoint the death benefit.

Australian courts have an inherent jurisdiction to supervise trustees and review exercise of a discretionary power. McMillan J had to determine if Caroline or Caroline and her husband had properly exercised the power as trustee when appointing the death benefit to Caroline. Her Honour’s reasons commence with noting the fundamental duty of all trustees, irrespective of the type of trust relationship with which that trustee is concerned; to become familiar with the terms of the trust instrument and to exercise his or her powers in the best interests of beneficiaries.  

McMillan J discussed the need for trustee powers to be exercised in good faith, upon real and genuine consideration in accordance with the purposes for which the discretion was granted and evidence the Court may consider in determining if this is the case. Her Honour noted that it is not the Court’s role to determine the weight the trustee should place upon different matters or whether a discretion is wisely exercised; only if it is in good faith and after genuine consideration. A lack of good faith or mala fides can include taking irrelevant matters into account or failing to consider relevant matters and it was noted that unreasonableness may be evidence of mala fides.

The deed of the SMSF was considered to determine the purpose for which the power to appoint the death benefit was granted to the trustee. Whether or not a trustee power is exercised for a proper purpose must be determined without reference to whether the trustee provides reasons. The right of the trustee to maintain privacy as to reasons for decisions is a right from which no inference may be drawn.

The Court determined that Caroline appeared to have been under misapprehensions as to the proper interpretation of the deed of the SMSF and the duties owed to the widower and to the estate. Her Honour found Caroline had not fulfilled her duty to familiarise herself with the trust deed and that Caroline’s uncertainty as to interpretation of the deed which resulted in the two sets of minutes should have been resolved by obtaining specialist advice on the meaning of the wording in the context of the Superannuation Legislation. The Court noted that although Caroline obtained legal advice she did not obtain specialist advice and this was evidence to infer that she acted improperly in payment of the death benefit. Further ‘the ill informed arbitrariness’ with which Caroline approached her role as trustee was considered to amount to bad faith.

The appointment of her husband as a second trustee was found to be inappropriate. Again the Court indicated that specialist advice should have been sought as to the proper management of the SMSF, as Caroline’s own lawyer had advised her. While no bad faith finding was made in relation to Caroline’s husband, he was found to have acted in a conflicted position. As the deceased had not appointed him a trustee there was no indication that she would have consented to that conflict as she had implicitly consented to the inherent conflict in Caroline’s role as trustee. In Australia conflict, without fully informed consent to that conflict, is of itself a breach of fiduciary duty.

The Court then went on to determine if the power was exercised for an improper purpose, that is if there was a fraud on the power. This requires no dishonesty nor even mala fides but an actuating purpose in the exercise of the power which is not justified by the trust instrument, here the deed of the SMSF. There was not evidence to support this finding. There was a genuine need under the terms of the Superannuation Legislation to distribute the death benefit promptly and it was distributed to a person properly eligible to benefit under the terms of the trust instrument.

The Court concluded that the power to distribute the death benefit was exercised without real and genuine consideration, it was an arbitrary and unreasonable exercise of the power and was set aside. The widower had asked for Caroline and her husband to be removed as trustees and an independent trustee appointed. He was asked to file further submissions as to the identity of a possible independent trustee noting that the trustee of a SMSF may not be paid for acting.    

This decision makes clear that the exercise of a trustee’s discretion in his or her own interest is not without risk. It makes even more crucial the need for Binding Death Benefit Nominations in cases where there may be more than one family member claiming that benefit, either directly or via the estate of the deceased member. The control of a SMSF remains crucial but is not of itself enough to guarantee that a death benefit will be paid as the member intends.

Finally, McMillan J has reminded all trustees of their duty to become familiar with the terms of the trust instrument and to exercise powers in the interests of the beneficiaries. Where a trustee has doubts about these fundamental issues specialist advice is essential to ensure proper exercise of a power and to help evidence that proper exercise.