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Dealing effectively with the passing of superannuation wealth

A recent Court of Appeal decision again highlights the importance of ensuring that your Estate Plan has properly considered how superannuation wealth is effectively passed to intended beneficiaries. This is becoming more important in the context of blended families and where a significant amount of wealth is in super. Preserving discretion may not be the best approach, but may result in costly protracted dispute. The best approach may be to put matters outside the discretion of trustees with the use of Binding Death Benefit nominations.

Wareham v Marsella [2020] VSCA 92

THE FACTS

A superannuation fund was established for Helen Swanson who was its only member until her death. Her death gave rise to a dispute regarding payment of a death benefit under the trust deed for the fund. The trust deed gave the trustees a discretion as to which of the deceased’s dependants should receive the benefit. The trustees appointed were the deceased’s daughter and son-in-law – Mr and Mrs Wareham. At the time of her death, Mrs Swanson and her daughter were the only trustees of the fund. Being the surviving trustee, Mrs Wareham appointed her husband as a second trustee and sought to pay the whole death benefit effectively to themselves. Mrs Swanson’s son, Charles Swanson, took no part in the original proceedings. 

Mrs Wareham’s step-father, Mr Marsella, who was Mrs Swanson’s husband for 32 years until her death, was the executor of Mrs Swanson’s estate. When finding that Mrs Wareham sought to pay the death benefit to herself, Mr Marsella commenced a proceeding seeking orders to remove the Wareham’s as trustees of the fund and to appoint substitute trustees. Additionally, he requested an injunction to impede the distribution of the fund and to require the Wareham’s to repay any sum that had been already distributed.

At trial, the judge held that the exercise of discretion should be set aside and the trustees removed, on the basis that Mr and Mrs Wareham exercised discretion as trustees without real and genuine consideration of the fund’s dependants. This was based on a number of issues such as the near formulaic recitation of facts in trustee minutes, and the fact that someone who potentially had a claim to the money, the deceased’s husband, had been completely left out of considerations. The trial judge made orders requiring a replacement trustee.

Mr and Mrs Wareham sought leave to appeal.

THE APPEAL DECISION

The appeal was dismissed, meaning that the decision at trial was upheld.

It is an established principle that unless trustees give reasons for the exercise of a discretion, their exercise of discretion cannot be reviewed of examined by the Court so long as they act in good faith and without an ulterior purpose: see Re Beloved Wilkes’ Charity (1851) 3 Mac. & G 440. The Court of Appeal considered the extension of this principle in the ‘essential component parts’ for the exercise of discretion set out by McGarvie J in Karger v Paul [1984] VR 131:

  1. That discretion is exercised by the trustees in good faith;
  2. With real and genuine consideration;
  3. In accordance with the purposes for which the discretion was conferred.

In considering these essential component parts and with consideration of the facts, the Court found that the trustees had not in fact acted in good faith with real and genuine consideration.

Consideration of the trustee minutes and correspondence from the trustee solicitors, the court found a number of errors, namely that the definition of ‘dependant’ in the minutes did not signify an understanding of the definition which might indicate the trustee’s proper consideration of all dependants. Further, the correspondence from the solicitor was used in determining the likely advice the trustee had received prior to making the death benefit decision. The Court noted that the trust had received accounting and legal advice, but had failed to employ a superannuation specialist.  

In addition to this, the Court stated that the presence of a clause in the trust deed allowing the trustee to enter into conflict transactions did not relive the trustee of the duty to act with real and genuine consideration. 

TRUSTEE DUTIES

The decision in Wareham v Marsella highlights duties of trustees when exercising discretionary decisions, serves as a reminder that the discretion would not be examined by the Court, so long as the exercise of discretion by trustees demonstrated the essential component parts set out in Karger v Paul. They are these:

  1. Good Faith

In determining good faith, McGarvie J in Karger v Paul considered the test of acting honestly to be the same as the test of acting in good faith, noting that honest blundering or gross negligence do not in themselves amount to bad faith. In Attorney-General (Cth) v Breckler [1999] 197 CLR 83 at [7], the High Court quoted the judgment of Northrop J that unreasonable, unfair or unwise exercises of discretion did not necessarily constitute need for an examination of discretion. Rather, Northrop J considered that when reasons have been given for the exercise of discretion, bad faith need be shown.

  1. Real and Genuine Consideration

In exercising the discretion to pay a death benefit trustees ought to consider: the intention of the deceased, by way of analysis of previous binding and non-binding death benefit nominations; the relationship between the deceased and the eligible beneficiaries; and the financial needs of each of the beneficiaries. In order to determine whether this consideration has taken place, the Court may look at things such as the inquiries made by the trustee, the information available to the trustee, the reasons given by the trustee for exercise of discretion, and the manner in which their discretion was exercised. In the current case, failure to consider the deceased’s husband of over 30 years shows a gross lack of consideration. The lack of professional superannuation advice sought also was taken as evidencing a lack of real and genuine consideration.

  1. In accordance with the purpose for which the discretion was conferred

The case of Curwen v Vanbreck Pty Ltd [2009] VSCA 284 showed that discretionary trusts were not, in fact, inviolable and could be considered by the court if the exercise of discretion were undertaken for an improper purpose. 

THE LESSONS

The outcome of this decision stresses the power of the Court to reverse trustees decisions and even remove trustees if they fail to act properly. 

This dispute could have been avoided if a Binding Death Benefit nomination had been used by the deceased and if discretion is being exercised that specialist advice be obtained about the factors that should be considered in that decision making.

If you have any questions on how to effectively pass on superannuation wealth, contact us

Call us on (07) 3252 0011 and speak with our client engagement team to make an appointment with one of our Estate Planning lawyers.

Written by Andrew Lind

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