A court has removed the trustees of a self-managed superannuation fund after it found that they had not acted in good faith when distributing the assets of the deceased fund member.
The ruling is a reminder that trustees must give genuine consideration to the interests of the dependants of a fund.
Helen Marsella established an SMSF in 2003. She was the sole member, and she and her daughter were the trustees. When Marsella died in 2016, she was survived by her husband of 32 years and her two children from a previous marriage – the daughter who was the surviving trustee and a son.
When Marsella died, the death benefit payable from the fund was $450,416. She had executed a death benefit nomination in 2003 to the benefit of her grandchildren. However, the fund’s deed stipulated that binding beneficiary nominations ceased to have effect after three years. There was no other written nomination when she died.
Her daughter, as surviving trustee, appointed her brother as second trustee of the fund. The trustees resolved to distribute the entire death benefit to the daughter.
Helen Marsella’s widower brought a case to the Supreme Court of Victoria, seeking removal of the brother and sister as trustees, the appointment of a new trustee, and the distributions from the fund to be set aside.
In the background to the case, there had been some dispute over the handling of Marsella’s estate, which included two properties. Marsella’s widower was the executor of the estate.
The question the court had to consider was whether the brother and sister had properly exercised their discretion in resolving to distribute the proceeds of the fund – “whether they acted in good faith, upon real and genuine consideration and in accordance with the purpose for which the [trustee] power was conferred.”
Marsella’s SMSF deed defined beneficiary as including a member or dependant who has an expectancy to receive payment of a benefit. That included the widower of the member and any child of the member.
The deed said that in circumstances where there were no members remaining in the fund, the fund was to be terminated and its balance distributed “in such manner as the trustee considers appropriate in accordance with the fund deed.”
While the deed afforded the trustees a broad discretionary power, a clause required that the trustees’ duties and power be performed in the best interests of beneficiaries.
In considering the question of whether a trustee has acted in good faith, upon real and genuine consideration and in accordance with the purpose for which the power was conferred, a court may look at the inquiries the trustee made, the information they had, their reasons for and their manner of exercising their discretion.
A lack of good faith may include taking account of irrelevant considerations and a refusal to take into account relevant considerations.
Unreasonableness may form evidence that a discretion was never really exercised at all.
There must be “active discretion”. If consideration is not properly informed, it is not genuine.
The court said it was not its role to consider the reasonableness of the outcome of discretion and “usurp” the role of the trustee. “But the outcome may form evidence that the discretion was not properly exercised or exercised in bad faith.,” it said.
“In the circumstances of this proceeding, the outcome of the defendants’ exercise of discretion, that is, the distribution of the entire proceeds of the fund to the first defendant [the daughter], supports the conclusion that there was a lack of real and genuine consideration.”
“On balance, the inference to be drawn from the evidence is that the first defendant acted arbitrarily in distributing the fund, with ignorance of, or insolence toward her duties.”