Wareham v Marsella – Trustees Duties and their implication for Self Managed Super Funds

Court of Appeal Superannuation Case

Managing your own self-managed superannuation fund (SMSF) brings with it estate planning issues. In addition to contemplating who will be entitled to receive your superannuation death benefit on your death, you must also consider who will take control of your fund if you were to lose capacity or die.

The issue of control has become a very important aspect of estate planning with recent cases being disputed in the Courts with the most recent being Wareham v Marsella [2020] VSCA 92.

This case discusses the importance of trustees of SMSF’s exercising its discretion when paying a death benefit with real and genuine consideration; ensuring the exercise of discretion is not in bad faith.

Background

The Swanson Superannuation Fund was established in 2003 by Mrs Helen Marsella and Caroline Wareham, her daughter from a previous marriage. Mrs Marsella managed her retirement funds via the Swanson Superannuation Fund (SMSF).

At the time of her death, Mrs Marsella did not have a current valid binding death benefit nomination (BDBN) in place to deal with her SMSF interest. Without the BDBN, the trustee, her daughter, was not legally required to distribute the death benefit to any particular superannuation dependent. As a trustee, the payment of the death benefit was left up to the trustees’ discretion.

After Mrs Marsella’s death, disputes arose between Riccardo Marsella (her husband) and her daughter which escalated into legal proceedings. While these proceedings were on foot, the daughter and her husband (appointed as a trustee by Mrs Wareham in April 2017) acting as trustees of the SMSF, made the decision to pay the entire death benefit ($450,416) to herself.

In the original decision, the Court held that Mrs Wareham and her husband should be removed as trustees of the Fund because they:

• failed to exercise the discretion afforded to them under the Fund deed by not giving real and genuine consideration to Mr Marsella.
• distributed the proceeds of the Fund in an arbitrary manner.
• distributed the proceeds of the Fund in the context of substantial personal conflict.

Court of Appeal decision

Mr and Mrs Wareham subsequently appealed on 10 separate grounds, stating that the primary judge erred in:

1. setting aside the exercise of discretion by the applicants as trustees of the Swanson Superannuation Fund afforded to them in clause 51.4 (b) of the governing deed and in concluding that the applicants exercised that discretion without real and genuine consideration of the interests of the dependants of the fund (Reasons 78 &
   56 & 58).
2. deciding that the applicants are to be removed as trustees of the Swanson Superannuation Fund when there were no factual bases to sustain that decision and to appoint a new trustee when the fund has been wound up (Reasons 44, 73, 79 & 80).
3. finding that the applicants were in a position of conflict and were not able to give real and genuine consideration to the interests of the dependants (Reasons 56 & 60).
4. concluding, contrary to established principle, that from the outcome of the applicants’ exercise of discretion that it was ‘grotesquely unreasonable’ and that the conclusion was supported by the outcome of the exercise of discretion (Reasons 51 & 56).
5. not accepting and or drawing adverse inferences from the unchallenged evidence that the applicants did exercise the power of appointment in accordance with their duties as trustees (Reasons at 54 & 55). Based on the fact that the evidence in the applicants’ case was received without objection and was not challenged in cross examination, the learned primary judge erred in concluding that the first applicant approached her duties with ill-informed arbitrariness that amounted to bad faith (Reasons at 57).
6. finding, contrary to the evidence of the first applicant that was received without objection or cross examination that the first applicant did not obtain specialist advice (Reasons at 55, 57 and 71). Alternatively, the learned primary judge erred in attributing weight to that finding.
7. taking notice of the findings and observations made in earlier Part IV proceeding (Reasons at 52 & 33) because those observations and findings were not matters of common knowledge within section 144 of the Evidence Act 2008 (Vic). Further, those matters unfairly prejudiced the applicants because the learned primary judge relied on them to sustain the conclusions reached (Reasons at 50, 57, 66, 73 & 79) without affording the applicants the opportunity to make submissions and to refer to relevant information relating to the acquiring or taking into account of knowledge of that kind as is necessary to ensure that they are not prejudiced.
8. holding that the power of distribution provided in clause 51.4(b) of the Swanson Superannuation Fund deed is a special power (Reasons at 47).
9. attributing weight to and drawing these inferences as to the conduct and state of mind of the applicants:
   1. The first applicant misunderstood the terms of the trust deed, the duties she owed to the respondent and the relevance of the respondent’s role as legal personal representative of the estate of the deceased (Reasons at 48, 49, 50).
   2. The applicants failed to take into account a relevant consideration by ignoring the plaintiff’s substantial relationship with the deceased and relatively limited financial circumstances (Reasons at 52).
   3. In the preparation and execution of distribution minutes, the first applicant was attempting to cover both interpretations of the fund deed (Reason at 53).
   4. The first applicant acted arbitrarily in distributing the fund, with ignorance of, or insolence towards, her duties (Reasons at 64).
   5. The first applicant acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict (Reasons at 56).

On 20 April 2020, the Victorian Court of Appeal dismissed Mr and Mrs Wareham’s appeal with the judgement reinforcing many of the lessons from the original Supreme Court judgment:

105: In our opinion, it has not been shown that the judge’s discretion miscarried in this respect. The fact that a decision as to distribution had to be made may well justify having addressed the matter notwithstanding that the parties were engaged in litigation. But those circumstances cannot be taken in isolation. The trustees made a decision, based on a failure to give the matter real and genuine consideration, which they have since defended both at trial and in this Court. The trustee or trustees who will re-exercise the discretion must, in order to give the matter real and genuine consideration, admit of the possibility of a different outcome. There is a real risk, at the least, that even with correct legal advice the interests of all potential beneficiaries may not be given that consideration by the present trustees, but that they may instead simply act to reinstate the decision, made in their own favour, which they have fought to uphold. In the circumstances, it has not been shown that the judge’s discretion miscarried.

The issue Mrs Wareham and her husband failed to recognise is that as the trustees of the SMSF there is a fiduciary relationship between the trustee and the beneficiaries, and for the purposes of a superannuation fund this extends to the potential beneficiaries of a death benefit.

A fiduciary duty is proscriptive, forbidding a conflict of interest and duty, and any unauthorised profit from use of position, property or confidential information (Breen v Williams (1996) 186 CLR 71). There is an exception to the “no conflict” rule which has been recognised in Mordecai v Mordecai (1988) 12 NSWLR 58 where a testator or a settlor with the knowledge of the facts imposes a duty on a trustee which is inconsistent with the pre-existing interest or duty which the trustee holds in another capacity. There has also been a UK authority which suggests that this exception extends to a trustee of a pension fund. Further, it is important to look at the deed itself to determine if the deed authorises the trustee to exercise a power or discretion notwithstanding the decision may directly or indirectly benefit the trustee.

But even if the trustee is able to overcome the conflict rule the risk remains, if any potential decision to pay the death benefit does not give “real and genuine consideration” to the competing interest of all prospective beneficiaries of the death benefit, the trustee will be in breach of its fiduciary duties.

Considerations

• Trustees need to give careful thought before exercising discretion in their favour.
• Trustees are subject to very strict duties which include the duty to properly inform themselves.
• Trustees must take great care to ensure they exercise discretions in good faith, upon real and genuine consideration, and for the purposes for which the discretion was conferred.
• Whilst the powers of a trustee are discretionary, their decisions must be considered carefully in the light of their fiduciary duties.
• Trustees must place a higher degree on the importance of obtaining specialist advice before decisions are made to distribute death benefits from an SMSF.
• The importance of maintaining valid binding death benefit nominations.

Rigby Cooke Lawyers is well placed to assist you or your clients should you have any concerns or questions with regard to the payment of a superannuation death benefit, preparation of valid death benefit nominations, agreements etc or more generally trust advice.