Death benefit allocation decision - overturned by Court

In the case of Estate of Helen Marsella (aka the “Swanson Superannuation Fund Case”) [2019] VSC 65, the Victorian Supreme Court has overturned the trustees’ death benefit allocation decision.  The Court found that the decision of the SMSF trustees was defective and the Court removed the trustees from their office.

Undoubtedly, this decision will be closely read by SMSF advisers and is likely to be a leading case on death benefit allocation decisions. 

Background

Helen Marsella, was the sole member of the Swanson Superannuation Fund which was a self managed superannuation fund.  The Fund was established in 2003 with Helen Marsella and her daughter Caroline as the two trustees.  They remained as the trustees until the death of Helen Marsella.

Helen Marsella died on 27 April 2016, leaving a superannuation death benefit then estimated to be approximately $450,000.  While she left a binding death benefit nomination, it was agreed by all the parties that the nomination was invalid.

As there was no valid binding death benefit nomination, the trust deed provided that the trustees had to allocate the death benefit to or amongst the eligible beneficiaries of Helen Marsella.  In the circumstances of the case it was accepted by the parties that the only eligible beneficiaries were Riccardo, the deceased’s husband of more than 30 years, who was also the legal personal representative of Helen Marsella’s estate (that is the executor) and her issue from her previous marriage being her daughter, Caroline and son, Martin.

Shortly after the death of Helen Marsella, disputes emerged between Riccardo and Caroline.  Riccardo commenced legal proceedings to have the court vary Helen’s will to provide greater provision for him, given that limited provision had been made for him in Helen’s Will.  Caroline also held that a particular property (“the Frankston property”) were held on pre-existing trusts for herself and her brother and therefore, did not form part of the Estate.   The claim for further provision was resolved in favour of Riccardo and the dispute as to the Frankston property was resolved in favour of the property being part of the Estate.

Almost a year after Helen Marsella died (and before the resolution of the two disputes), the daughter as sole surviving trustee made a decision (the death benefit allocation decision) to appoint the entire death benefit to herself and also made a decision to appoint her husband as co-trustee.

Riccardo successfully commenced legal proceedings to challenge the death benefit allocation decision and also to remove the two trustees.  The Court held that the death benefit allocation decision was defective and that two trustees should be removed.  The decision was defective because the trustees exercised the allocation power in bad faith and with inadequate deliberation.

Why was the death benefit nomination invalid?

The nomination was invalid for two reasons.  Each reason was sufficient for the nomination to be invalid.

The first reason being that the deceased nominated her grandchildren, and grandchildren are not dependants within the meaning of the SIS Act simply by virtue of their status as grandchildren.  Additionally, the grandchildren were not dependants by reason of being financially dependent on Helen.

The second reason being that the trust deed of the SMSF imposed a three year time limit on binding death benefit nominations and the three year time limit had already expired.

Under superannuation law the “will like” execution requirements and the three year time limit do not automatically apply to self managed superannuation funds, but they can apply if the trust deed of the self managed superannuation fund incorporates them – whether explicitly or implicitly.  In this particular case, the three year time limit was expressly incorporated into the terms of the Fund.

How can a death benefit allocation decision be invalid?

A death benefit allocation decision can be challenged on a number of grounds.  Riccardo alleged that the allocation decision was defective as the decision was made in bad faith; for improper purposes and with inadequate deliberation.

The Court held that the allocation decision was made in bad faith and with inadequate deliberation but did acknowledge that the decision was not made for improper purposes.

What are the 5 key lessons from the case?

There are five key lessons from the Swanson Superannuation Fund case.

First – ensure that the trust deed has a conflicts clause – that is, a provision which permits the trustee (or a director of the corporate trustee) to exercise a discretion even if the trustee (or director) has an interest in the exercise of that power.

Second – ensure that the trustee correctly understands the trust deed rules relating to the allocation of a death benefit.  This entails understanding that the trustee must exercise the allocation power (this is the power to select which beneficiary or beneficiaries is to receive the death benefit and, if more than one beneficiary is selected, the proportion of the death benefit each selected beneficiary is to receive).

Third – the trustee must ascertain all relevant information as to the allocation before the allocation decision is made.  This includes identifying each potential beneficiary, obtaining information as to each potential beneficiary’s current means and finances, obtaining information as to each potential beneficiary’s requirements and finally, obtaining information about each potential beneficiary’s relationship with the deceased.  This information could be contained in a report prepared for the trustees and tabled at a trustee’s meeting.

As the Court will not investigate or consider what weight the trustees should have given to each of beneficiary’s current means and circumstances, their requirements or the nature of the relationship with the deceased, the trustees should simply note that they have considered the relevant information and then made an allocation decision.

Fourth – the trustee (and its agents – for example the trustee’s lawyers) must never be dismissive of a beneficiary or their merits.  In particular an agent for the trustee (again for example the lawyers acting for the trustees) must not use language which indicates that the trustees have summarily dismissed or discounted a potential beneficiary’s entitlement to be considered in the allocation decision.

In this particular case the lawyers language in their correspondence with Riccardo (or more correctly Riccardo’s lawyers) clearly showed that they misunderstood the legal nature of the allocation power (it was a special power and not a general power); did not recognise Riccardo as a potential beneficiary of the death benefit and failed to consider the strength and merits of Riccardo’s claim to be considered for selection (ie duration of the marriage – over 30 years with the marriage only terminating by reason of the death of Helen; and also the relatively modest provision for Riccardo from the Helen’s Estate).

Fifth - the trustee should, before making an allocation decision, obtain expert advice and consider the merits of the advice.  While a trustee is not bound to follow expert advice, if they decide not to follow the advice they must have a reasoned view as to why they are not following the advice.

How could this matter been avoided?

Had Helen had a properly drafted binding death benefit nomination then this case would never have arisen.

Firstly, a properly drafted nomination would have avoided nominating individuals who were not eligible to receive the death benefit.

Secondly, a properly drafted nomination would have alerted Helen to the three year lapsing requirement.  This would have enabled Helen to diarise for a renewal of the nomination or, alternatively, amended the Governing Rules to remove the three year lapsing requirement. There was no reason why the three year lapse requirement could not have been removed from the Governing Rules of the Fund by means of a suitable amendment deed.

Had there been a valid binding death benefit nomination naming Caroline as only beneficiary, the death benefit would have been paid to Caroline.  The only function of the trustees in this situation would have been to be satisfied that the nomination was valid and then to implement the nomination.

Riccardo would, however, still have the right to seek further provision from the Estate of Helen and the strength of his claim would have been materially improved.