Battle for control of the SMSF

What happens when a member of an SMSF dies without having made a binding death benefit nomination?  Most trust deeds, in this situation, provide that the death benefit will be allocated at the discretion of the trustee. Will all be well in the end?

Possibly.  But where the surviving member is the second spouse of the deceased member and the deceased member made a Will leaving her super entitlements to her daughters what happens?  There will be a battle for control of the trustee.

This situation was considered recently by the WA Supreme Court: Ioppolo & Hesford v Conti [2013] WASC 389.

The Conti Super Fund was a two member SMSF where each member was a trustee.  The two members were married but it was a second marriage for the wife.  The wife had four adult daughters from her previous marriage.  While the wife had previously made binding death benefit nominations (both specifying that the benefit was to be paid to the second husband), they were subject to a limitation period and were out of time.  The wife also had a Will (which was signed at about the same time as her last nomination) which provided that her super entitlements were to be paid to her four daughters.  For completeness, the Will contained a provision that the wife expressly did not want her super benefits to be paid to her (second) husband.

On the death of the wife, the husband became the sole trustee and also the sole member.  The husband after the death of the wife appointed a company as sole trustee and he ceased to be trustee.  The husband was the sole director and sole shareholder of the company which acted as corporate trustee.

The wife’s death benefit was about $650,000.  Under the rules of the SMSF (if there is no binding death benefit nomination) the trustees were required to pay the death benefit to such of the spouse, children, or other financial dependents as were selected by the Trustee.   Consequently, the new corporate trustee (controlled by the husband) could pay the $650,000 to the husband, or to the four children, or to all of them.

The corporate trustee resolved to pay the death benefit entirely to the husband.  

The two adult daughters who were joint executors of the wife’s estate commenced legal proceedings to be appointed co-trustee.  Presumably, as co-trustee, they would be in a position then to influence the allocation of the death benefit.

The daughters had four arguments to support this claim.  The first, was that the husband was, by force of the SIS Act, required to appoint one of them as co-trustee in order for the fund to continue to qualify as an SMSF.

The Court rejected this argument.  The Court held that the SIS Act permitted an executor to be appointed as a trustee for the period from the death of the member until the death benefit was paid, but the SIS Act did not require the executor to be appointed.  

The second argument of the daughters was that the discretion to allocate the death benefit had to be exercised in a bona fide manner and the corporate trustee, in allocating the entire benefit to the husband, did not exercise its discretion bona fide.  It seems that the argument for the daughters was that simply appointing the benefit to the husband was itself sufficient evidence of bad faith.  The Court held that as no evidence was provided of any bad faith and as the trustee did obtain legal advice form specialist lawyers, which advice was to the effect that the trustee could allocate the entire benefit to the husband, there was no basis for this argument.

The daughters also argued that as the trustee had disregarded the statements in the wife’s Will (that she did not wish her super benefit to be paid to her husband) and allocated the death benefit contrary to those wishes amounted to bad faith.  The Court held that they trustee could consider but was not bound by those expressions of intent.  Importantly, the Court held that disregarding those expressions of intent did not constitute bad faith.  

The third argument was that one of the co-executors should be appointed as co-trustee under the statutory powers of trustee appointment set out in the Trustees Act 1962 of WA.  The Court declined to make the appointment as there was no evidence that the current trustee would not properly discharge its duties.

The final argument was that the trustees exercise of the discretion to allocate the benefit to the husband should be judicially reviewed.  The Court rejected this argument as the case for review had not been established on the evidence.

The outcome of the case is that the trustee had made a decision to allocate the entire benefit to the husband and the husband would be paid $650,000.  The situation could have been very different if the wife had made a binding death benefit nomination.

Issues raised by this case

It is interesting that the daughters did not challenge the appointment by the husband as sole surviving trustee of a company of which the husband was sole director and sole shareholder.  The appointment could be challenged on the basis the company was ineligible to be appointed, or that the appointment of such a company, amounted to a fraudulent appointment.  

In regards to the first ground – the appointment of a company was clearly an option under the SIS Act and the appointment of a company of which the member was the director was required by the SIS Act.  Therefore there was no basis to conclude the company could not be appointed.

In regard to the second ground – that the appointment of such a company was a misuse of the power – as the daughters did not adduce any evidence that the company would not discharge its duties as trustee in a proper manner – there was no evidentiary basis for their argument.  The mere fact that the member was the sole director did not constitute evidence that the company would not properly discharge its trustee duties.

Other aspects  -  removal of the corporate trustee under statutory powers

Also the daughters did not seek to have the Court remove the trustee under the powers conferred by the Trustee Act.  There has recently been a case where the Court did remove a trustee of an SMSF.  In that case the removed trustee had, without proper authority, effected his own benefit payments and had evidenced an intention that he would not carry out his role as trustee by simply declining to participate in necessary trustee actions.  Further, the two trustees were brothers and their relationship had deteriorated to such an extent they could not function as trustees.

While there is jurisdiction to remove a trustee, a very good case must be made out.  The possibility that a trustee, or director of the corporate trustee, is eligible to receive the death benefit and therefore may be tempted to act in their own interest was not sufficient reason to remove the trustee.  Such conflicts are inherent in SMSFs and are an obvious outcome of the requirement that members participate in the management of the fund.