Poor docs create client minefield

SMSF documents

SMSF advisers should be working to eliminate out-of-date documents that are held by trustees to prevent strife when a death benefit must be paid.

Financial advisers who do not keep comprehensive documents trails for their SMSF clients are creating a minefield of trouble for them in the future, according to a lawyer who was involved in the recent appeal of the Marsella case.

Hill Legal director Chris Hill said the initial case of Marsella v Wareham (No 2) [2019] VSC 65, and its recent appeal (Wareham v Marsella [2020] VSCA 92), had implications for financial advisers as to what inquiries should be made and how that information was documented and reviewed.

During a webinar presented by Smarter SMSF today, Hill highlighted that while the SMSF death benefits at the centre of the dispute were initially covered by a binding death benefit nomination (BDBN), it lapsed after three years and was not reviewed at any time in the 13 years between the establishment of the fund and the death of the sole member, Helen Swanson.

As a result of this lapse, the death benefit was not directed to the beneficiaries indicated in the BDBN and instead the remaining trustee, Swanson’s daughter Carol Wareham, used their discretion to pay the entire benefit to themselves.

“At a practical level, this case emphasises the importance of people getting advice about their death benefits and reviewing them in accordance with the terms of the deed on a regular basis,” Hill said.

He highlighted the matter only reached court because the death benefit was paid to a dependant who was not an object of the discretion in the trust and could have been avoided if the nomination had been renewed and specifically mentioned Wareham.

“Any adviser and their client can be in this scenario, dealing with the traps and snares and issues that come up in this case, if they have a nomination that does not comply with the terms of the deed, as we have seen in the Munro and Donovan cases,” he said.

“It is black letter law at work here and if the form does not comply, you will have an invalid nomination. If you have a chain of documents that are defective, such as a trust deed that is not validly updated with nominations that comply, you will end up in a situation where the trustee will have to exercise a discretion as a result of a defective nomination.”

He said trustees who are forced to exercise a discretion in paying out a death benefit “will have to go through the treacherous process of making sure they have a complete document trail and then deciding if they give evidence for their decision”.

“It behoves advisers then to be more vigilant and careful about document trails, especially death benefit nominations,” he noted.

“We will be finding more people in this situation who have to exercise a discretion and, based on the Wareham case, if you pay the entirety of the death benefit to yourself, there is a strong inference that it will be regarded as grossly unreasonable and you have not given proper and genuine consideration.

“This is a minefield for people who don’t keep proper document trails and who don’t review documents, especially death benefit nominations.”

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