The case of Re Marsella; Marsella v Wareham  VSC 312 (13 June 2018) concerned a claim by the widower of the willmaker for further provision from the estate of the deceased pursuant to Part IV of the Administration and Probate Act 1958. It was held that a life interest in a unit and a small capital fund was not adequate provision for the proper maintenance and support of the widower. There was a dispute between the parties as to the assets of the estate. The widower asserted the house in which he lived was an asset of the estate but the daughter of the deceased asserted that the deceased held the property upon trust and that the estate did not have a beneficial interest in the house. Further, the widower asserted that an entitlement in the sum of $486,716.34 which the deceased had as a member of her self managed superannuation fund (SMSF) was an asset of the estate (although a death benefit is not an asset of the deceased member’s estate and might be better described as a contingent asset subject to any binding death benefit nomination, terms of the SMSF deed, or exercise of trustee discretion). The widower also contended that he was eligible to receive the death benefit as he falls within the definition of dependant.
In this case, the Court had to strike a balance between a broad general rule and the specific facts of the case. The broad general rule is that a willmaker should provide surviving spouse with the security of an appropriate home in which to live, a secure income and a fund to meet unforeseen contingencies, with an entitlement to independence, self-respect and autonomy. The specifics of the case included such matters as the size of the estate, the age and station in life of the widower and the claims of other persons who have legitimate claims upon the estate.
The Court determined that provision should be made for the plaintiff’s proper maintenance and support by way of a flexible life interest (as distinct from a life interest limited to a particular property) in the house in which the widower had lived (as distinct from the smaller unit) and a pecuniary legacy in the sum of $100,000. That would enable the widower to down size and even move into supported accommodation and would also protect the capital (in respect of the house) for the beneficiaries of the estate.
The case of Re Re Marsella; Marsella v Wareham (No 2)  VSC 65 concerned an application from the widower to have the trustees of the deceased’s SMSF removed pursuant to s 48 of the Trustee Act 1958 and have the trustees’ decision to distribute death benefits set aside. The death benefit nomination made by the deceased had lapsed and in any event purported to direct benefits to her grandchildren who were not dependants. The daughter of the deceased as surviving trustee of the SMSF purportedly appointed her husband as co-trustee and they resolved to distribute the death benefits to the daughter. The widower asserted that the trustees did not act in good faith, upon real and genuine consideration and in accordance with the purpose for which the power was conferred and that the trustees should be replaced by an independent trustee and the death benefits repaid to the SMSF.
The SMSF deed provided that in the absence of a valid binding death benefit nomination, as per paragraph 12 of the judgment, “the death benefit must be paid or applied to or for the benefit of a person nominated in writing by the deceased member, provided that the trustee is satisfied that the person was a dependant, one or more dependants of the deceased member, or the legal personal representative of the deceased member. The payment is to be in such proportions between all or any of those persons or categories of persons as the trustee shall determine in its discretion.”
A significant aspect of this case is that the trustees of the SMSF were not executors of the deceased’s estate; the widower was the executor. Therefore, this case does not concern a common conflict between duties and interests examined by other recent cases where an executor of the deceased estate was also trustee of the SMSF and had a duty to pay the death benefits to the deceased estate.
A practical point which may appear relevant is that where a death benefit is paid out and the SMSF wound up, to replace trustees it would first be necessary to make a successful application to the Court to recreate the SMSF. The Court addressed this submission at paragraph 44 of the judgment, “If such a submission were accepted, it would allow a trustee to avoid the jurisdiction of Court regarding a breach of trust simply by terminating the trust. The defendants’ submission is rejected.”
Any conflict between the daughter’s duties as trustee and her interests as an eligible beneficiary (or perhaps more technically a discretionary object in respect of the special power of the trustee) might be said to arise in circumstances where the deceased, who appointed the daughter as trustee, was aware of the conflict and impliedly consented to or tolerated the daughter exercising the special power in her own favour. But the Court took the view, as per paragraph 47 of the judgment, “The fact that the first defendant falls within the class of objects did not negate her duty to exercise the power in good faith, upon real and genuine consideration, and for the purposes for which the power was conferred.” The Court went further as per paragraph 48, “It has been suggested that the donee of a fiduciary power ought to be even more vigilant that she has discharged her duties when exercising the power in her own favour. Here, it appears the first defendant took the opposite approach. Based upon the correspondence of [the daughter’s lawyers], the first defendant appears to have approached the exercise of discretion under misapprehensions as to the terms of the fund deed, the duties she owed to the plaintiff and the relevance of the plaintiff’s role as legal personal representative of the estate of the deceased.” Further, unlike the position of the deceased’s daughter, the daughter’s husband was not appointed by the deceased and as such he had a duty to avoid a conflict between his duties as trustee and his interest’s (or his wife’s) in respect of the potential benefit from the SMSF.
As to whether the trustees should be removed, the Court found as per paragraph 73, “The defendants failed to exercise the discretion afforded to them under clause 51.4(b) by not giving real and genuine consideration to the interests of the defendants. In distributing the proceeds of the fund to the first defendant they arbitrarily dealt with the entirety of the property subject to the trust. They did so in the context of substantial personal conflict with the plaintiff. In all the circumstances it is appropriate for the defendants to be removed as trustees of the fund.”
The Court required further submissions be filed in respect of the appointment of a new trustee.
The exercise of discretion to pay the death benefits to the daughter was set aside as the discretion was exercised without real and genuine consideration to the interests of the dependants of the deceased member.
Some key observations are as follows:
Relevant factors to consider include the intention of the deceased, the relationship between the deceased and the dependants, and their financial circumstances and needs.
A statement in the resolutions that refers to consideration of the possible interests of all dependants of the deceased member, the potential eligible beneficiaries of the member, and the member’s estate, would not necessarily indicate that any misapprehensions the trustee was under were otherwise resolved and may simply be seen as formulaic.
A failure to acknowledge a potential conflict or seek advice in relation to resolving uncertainty surrounding the SMSF deed and/or significant financial decisions, may indicate an ignorance or deliberate mischaracterisation of the true circumstances at hand.
Even if the exercise of the daughter’s discretion was made in bad faith and without real and genuine consideration, the inference cannot be drawn that it was made for an improper purpose, particularly as she was an eligible recipient and the death benefit had to be paid out within a reasonable period of time.
In respect of the daughter’s husband, agreeing to be appointed as co-trustee despite his position of conflict and acrimony between the parties, agreeing to distribute the funds the same day he was appointed and the outcome of that resolution being on one view unreasonable, raise suspicion that he did not exercise the power upon real and genuine consideration.
The daughter’s husband, as co-trustee, may not have been acting in bad faith but was acting in breach of his duty to avoid conflict.
The appointment of a relative as a co-trustee may compound acrimony, make it harder for a trustee to bring a rational mind to her duties.
Where the trustee is a trustee of an SMSF there is tension between the requirements of section 17A of the Superannuation Industry (Supervision) Act 1993 and the desire of courts to have independent trustees.
Following the removal of the trustees and expected appointment of an independent trustee, it remains to be seen whether the widower will receive any benefit from the SMSF or whether it will be paid to the estate of the deceased or another dependant. There may even be additional consideration given to the taxation consequences of failing to pay the death benefit within a reasonable period of time. Interestingly, if an independent trustee is appointed as trustee of the SMSF, then the SMSF will potentially be in breach of section 17A of the SIS Act and the SMSF will become a non-compliant superannuation fund.
This case is a reminder to trustees and other fiduciaries (including trustees of SMSF’s, discretionary trusts, testamentary trusts and deceased estates) that their powers are subject to strict duties and advice should be sought early where there are decisions to be made.Ultimately, a decision to pay the death benefits to the deceased’s daughter may not have been improper, but the discretion was exercised by the trustees without first giving real and genuine consideration to the interests of the dependants of the deceased member.
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