Blended Families and SMSFs

A recent dispute before the Victorian Supreme Court (Davern Family Super Fund – [2018] VSC 80) has again illustrated the care with which SMSFs involving blended families need to be handled.  The relevant parties are Kevin (the deceased); Elizabeth - the second wife; Pamela, one of the three children of Kevin by his first marriage and Matthew, the executor of Kevin’s estate (who is not a family member).

In September 2003 Kevin established his super fund which satisfied (at least initially, the definition of an SMSF).  Kevin was the only member and Kevin and Elizabeth were the trustees.

In June 2008 Kevin adopted a new deed for the SMSF and the new deed named Kevin as the sole trustee of the SMSF.  How Elizabeth ceased to be a trustee is not disclosed in the reasons.  (Editor’s comment: this is not a correct structure for an SMSF - a single member SMSF with a non-corporate trustee must have two individual trustees.)  Further, the reasons do not explain why only Kevin was involved in the amendment process and not Kevin and Elizabeth in their capacities as trustee.  It may have been the case that the amendment power was conferred solely on the members of the fund, in this case being Kevin.  (Editor’s comment: conferring the amendment power solely on the members of the fund is not usual but also it is not contrary to the Superannuation Industry (Supervision) Act if the fund is an SMSF.)

In December 2014, Kevin made a binding death benefit nomination under the terms of the 2008 deed.  The nomination was solely in favour of Elizabeth his second wife.  The precise nature of the determination was not disclosed in the reasons.

Kevin died in April 2016. Probate of his will was granted to Matthew who was appointed executor by the will and is therefore the legal personal representative of Kevin.  The will was made in December 2007.  The terms of the will provided that a $50,000 legacy be paid to Matthew and residue (about $164,000) be applied as to 50% to Elizabeth with the other 50% split between Pamela and her two siblings.

By some means, which is not explained in the reasons, Pamela acted as the sole trustee of the fund following the death of Kevin.  Generally, on the death of a sole remaining trustee, the legal personal representative of the remaining trustee “inherits” the trust assets by reason of being the successor in legal title to the assets and the legal personal representative holds those assets in trust pending the appointment of a replacement trustee.   Once the replacement trustee is appointed, the legal personal representative must transfer the assets to the replacement trustee.  The legal personal representative does not (unless the trust deed provides for such an appointment to take place) become the trustee of the fund.  As the representative does not become the trustee of the fund, the representative is not authorised to exercise any of the powers conferred on the trustee by the trust deed and has none of the protections provided by the trust deed.  

However, the general position will not apply if the trust deed has a provision which appoints the legal personal representative as the replacement trustee.  In this situation, the legal personal representative is appointed by virtue of the trust deed and not simply by being the legal personal representative.  So it is a mystery as to how Pamela (and not Matthew) became the sole trustee of the fund – she was not the legal personal representative of the deceased trustee (Matthew was).  (Editor’s comment: possibly it simply was the case that Pamela appointed herself?  In this situation she would not be entitled to exercise any powers conferred by the trust deed but would have all the liabilities of a trustee and she would be referred to as trustee de son tort (legal French for an individual who has acted as trustee but has not been duly appointed as trustee). Another possibility is that the 2008 trust deed expressly named Pamela as the successor sole trustee of the fund.  While this is not contrary to trust law it will not satisfy the requirements of the Superannuation Industry (Supervision) Act as Pamela is not the legal personal representative of Kevin.)

Elizabeth requested that she receive a monthly benefit from the fund.  Presumably, Elizabeth was requesting that the death benefit which was payable to her be paid in the form of an income stream.  Pamela made three monthly payments then discontinued the payments.  Elizabeth was advised by Kevin’s son that the children were dissatisfied with the amounts they received from the estate and wanted $100,000 each from the estate.  (Editor’s comment: presumably this was the reason for Pamela discontinuing the monthly payments: to permit the super fund to be used as the source to augment their payments from the estate and that the son was speaking on behalf of Pamela as well.)

Inevitably and predictably both sides lawyered up. A number of key legal issues were quickly identified: whether the 2008 trust deed had been validly made; whether Kevin had been validly appointed as sole trustee; and whether the binding death benefit nomination was valid.  Elizabeth sought judicial advice and orders that the 2008 deed had been validly made (and thereby the nomination was validly made and binding) and that Kevin had been appointed sole trustee (presumably permitting Matthew to act as sole trustee rather than Pamela) or, alternatively, sought an order that Pamela be removed as trustee and that two independent trustees be appointed.  Pamela argued that there was no need for her to be replaced as trustee and appointing replacement trustees would not be in the best interests of the SMSF as they would charge fees.

The fees ground for objection to the appointment of independent trustees was quickly eliminated as the two proposed trustees (Matthew and another person) agreed not to charge trustee fees.

The Court considered that it would be in the best interests of the SMSF for Pamela to be replaced as trustee and for the substantive issues of whether the 2008 deed had been validly made (and whether therefore the nomination was valid) should be separately considered.

The Court decided to remove Pamela as trustee given her action to disregard her duties as trustee as she had unilaterally decided that the binding death benefit nomination was not effective.  This action indicated that she would not discharge the duties as trustee in the appropriate manner.  Consequently her removal as trustee was warranted. 

Pamela should either have resigned as trustee (and then pursued her interests as a potential beneficiary of the death benefit) or sought judicial advice as to whether the death benefit nomination was valid or invalid.

Potential conflicts of interest are embedded in SMSFs due to the requirement that members must be trustees (and vice versa).  However, this does not prevent trustees exercising discretionary powers which may benefit them in their capacity as a beneficiary. The spouse of a deceased member can allocate the death benefit to themselves.  However, the trustee could not unilaterally decide that a a binding death benefit nomination was invalid and then disregard the nomination, as such action is tantamount to a trustee disregarding the terms of the trust deed in order to prefer her own interest as a potential beneficiary.