Author: Emma Partenza, Manager, TAG Financial Services
In the absence of a valid death benefit nomination, a trustee can exercise their discretion under the fund’s trust deed on payment of the death benefits to beneficiaries. As a result of this discretion, conflicts may arise where the trustee is also a beneficiary of the deceased.
In exercising discretion in good faith, upon real and genuine consideration for the purposes for which it was conferred (that is, giving real and genuine consideration for any potential beneficiaries), trustees should:
- determine all eligible beneficiaries of the deceased, their relationship to the deceased and their personal financial situation.
- understand the deceased member’s wishes detailed in their Will or on the binding nomination.
- seek specialist advice regarding the payment of death benefits, especially where the trustee is also a beneficiary of the deceased.
These outcomes resulted from the Wareham v Marsella case:
The deceased member had left an invalid death benefit nomination that nominated her superannuation benefits to be paid to her grandchildren from her first marriage. The deceased and her daughter were individual trustees of the SMSF, leaving the daughter as the sole remaining individual trustee to pay out the death benefits on her mother’s death. The entire death benefit of the deceased was paid to herself (as a dependent of the deceased). The deceased’s daughter (Helen) subsequently appointed her husband as a second individual trustee and re-executed documents paying the death benefit to herself.
The deceased’s husband claimed the death benefit should have been paid to the deceased’s estate (he was executor) or to him personally being a dependant of the deceased. He also claimed an independent trustee should have been appointed to attend to the death benefit payout.
The court found Helen had not fulfilled her trustee duty and had acted improperly and in bad faith as she had not given real and genuine consideration to the deceased’s husband as a potential beneficiary. The benefit was ultimately not paid following her mother’s wishes, as per her invalid death benefit nomination, she wished her benefits to go to her grandchildren; her Will also provided a life interest in a property to her husband and balance of her estate to be passed to her surviving daughter and son. Helen’s brother, who also had children, was not considered as a potential beneficiary by Helen in the payment of death benefits. Helen’s trustee discretion was not exercised in real and genuine consideration been given by Helen to all her mother’s dependants in the payment of the benefits.
Courts do not conclude on the fairness or reasonableness of the trustee’s decision, however, that the trustee’s discretion was made in good faith and after genuine consideration being given. In this case, the payment of entire death benefits to herself supported the court’s conclusion the trustee did not exercise discretion in good faith and lacked real and genuine consideration having been applied.
It can be learned from this case that a trustee who is also a dependent of the deceased must exercise their trustee discretion in good faith, having given real and genuine consideration to all potential beneficiaries to avoid potential conflicts of interest that could arise in payment of the death benefit.
It is critical to ensure all potential beneficiaries are identified by the trustees and considered in respect to the decision on payment of the death benefit and make sure:
- Documentation is put in place that details the trustee’s decision-making process in the exercise of their discretionary powers. This will assist in demonstrating a trustee has made all reasonable enquiries of potential beneficiaries and their circumstances to give real and genuine consideration in their decision to pay a death benefit.
- Adequate documentation should be done on a case-by-case basis – caution should be given to using a Pro-forma template to document these decisions as this could create problems in establishing real and genuine consideration having been given by the trustee. In these instances, there is potential for a challenge of the trustee’s decision and documented evidence will prove the trustee acted under their responsibilities as trustee of the fund. It is important to note from the Marsella case a trustee is not obliged to provide reasons for their decision.
Potential conflicts of interests that can arise re-affirm the importance of specialist advice being obtained and proper estate planning being implemented, including valid binding death benefit nominations being in place by the member.
If you have any questions, please contact us on 03 9886 0800 or via email.
Technical Updates for Accountants
Receive super updates, webinar invites, seminar information and much more! Join our online community.
Specialist Advice
If you would like to discuss a project, contact us. Our advice is quoted upfront for your approval before commencement.
Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2020. Please do not reproduce without the expressed written consent of the author.