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Court reinforces trustee standards

SMSF trustee standards

The recent dismissal of an appeal brought by an SMSF trustee has highlighted the need for them to maintain high standards and act in good faith.

On 21 April 2020, the Victorian Court of Appeal handed down Wareham v Marsella [2020] VSCA 92. This judgment represents the appeal of Marsella v Wareham (No 2) [2019] VSC 65 and speaks to the issue of an SMSF trustee and their obligations to maintain standards in that role.

In brief, the appeal was dismissed. The appeal judgment shows trustees (including an SMSF trustee) are held to very high standards, and when performing their duties, they must act very carefully to ensure they are acting in good faith, upon real and genuine consideration, and for proper purposes. If the trustees fail to do so, a court might reverse key decisions the trustees have made and remove the trustees.

This case is very relevant in the context of death benefit payments.

The facts of the case

In 1981, Mr and Mrs Swanson were a married couple and had two teenaged children when Mr Swanson died in a motor vehicle accident. In 1984, Mrs Swanson married Mr Marsella. In 2003, she commenced an SMSF, of which she was the sole member. The trustees of her fund were herself and one of her children from her prior marriage (Mrs Wareham). This structure continued until her death on 27 April 2016. Upon her death, the death benefit payable from the fund was $450,416. She did not leave a binding death benefit nomination upon death. She did leave a will appointing her second husband (Mr Marsella) as executor.

Relations between Mr Marsella (her second husband) and Mrs Wareham (the daughter from Mrs Swanson’s prior marriage) were strained. There was evidence of a physical altercation between Mr Marsella and Mr Wareham on 9 July 2016 in connection with a disputed clock that Mrs Wareham removed from the marital home the late Mrs Swanson and Mr Marsella had lived in together during their 32 years of marriage.

Despite the fact Mr Marsella was his late wife’s executor, he did not control the SMSF following her death. Rather, it appears that under the particular SMSF deed, Mrs Wareham was left in control of the fund.

On 17 April 2017, Mrs Wareham, as the sole trustee, determined to distribute all superannuation death benefits to herself. On the same day, she also appointed her husband as a co-trustee and then the two of them made the same determination again (that is, to distribute all superannuation death benefits to Mrs Wareham).

On 24 April 2017, Mr Marsella became aware assets of the SMSF were being sold. His solicitors wrote to the solicitors acting for Mrs Wareham seeking an explanation. On 27 April 2017, Mrs Wareham’s solicitors replied, stating (among other things): “Your client is neither a member, trustee or beneficiary of the fund, and as such our client is not required to consult with him on any matter relating to the administration of the fund, nor to provide any undertakings or accounting as requested in your letter of today’s date.”

On 4 May 2017, Mrs Wareham’s solicitors sent another letter stating (among other things) that no conflict of interest arose and that Mrs Wareham was permitted to exercise her discretion in favour of any eligible object, including herself. The letter also stated she owed “no duty to the estate or other beneficiaries”.

Mr Marsella commenced a proceeding seeking orders removing Mr and Mrs Wareham as trustees of the fund and appointing a substitute trustee. He also sought an injunction restraining distribution of the fund and an order requiring the applicants to repay any sum already distributed. Mr Marsella was successful in doing so. See Marsella v Wareham (No 2) [2019] VSC 65 where the trial judge held, among other things: “The ill-informed arbitrariness with which [Mrs Wareham] approached her duties also amounts to bad faith. The dismissive tenor of the correspondence from [Mrs Wareham’s solicitor], the willingness to proceed with the appointment and distribution in the context of uncertainties and significant conflict and the lack of specialist advice … all support the conclusions that her conduct was beyond ‘mere carelessness’ or ‘honest blundering’.”

The trial judge reversed the Warehams’ decisions to pay the superannuation death benefits to themselves and removed them as trustees.

The appeal

The Warehams appealed on 10 separate grounds. Those grounds included items such as that the “learned primary judge erred in setting aside the exercise of discretion by the applicants as trustees of the Swanson Superannuation Fund … and in concluding that the applicants exercised that discretion without real and genuine consideration of the interests of the dependants of the fund”.

We do not describe all of the grounds of the appeal here as the Court of Appeal dismissed it.

Practical implications

The Court of Appeal’s judgment reinforces many of the lessons from the original Supreme Court’s judgment. In particular, we note that trustees are subject to very strict duties. These duties include the duty to properly to inform themselves. Further, 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.

If in doubt, it is entirely appropriate (and dare we say desirable) for trustees to seek specialist legal advice. Whether or not Mrs Wareham had received specialist legal advice was an issue that received significant discussion in the Court of Appeal’s judgment. The court was not satisfied she had received specialist legal advice.

Bryce Figot is special counsel and Daniel Butler is director at DBA Lawyers.

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