The duty of an SMSF trustee to act in good faith and honour agreements is not sufficient to automatically redirect a member’s pension to their spouse upon the death of the member, unless it is defined in the fund’s deed, a legal specialist has stated.
DBA Lawyers special counsel Bryce Figot said many people assume a trustee was bound by the good faith requirements, as well as the law of contracts, but trust law did not support this approach.
Speaking during an online briefing today, Figot gave the example of a trustee agreeing with a member to pay a pension to them and following their death to automatically continue paying that income stream to the member’s spouse.
“The member then dies. Can the spouse force the pension to be paid to them?” he said.
“Most people think trustees must act in good faith and honour their agreements and for the majority of people who said the trustee agreed to do something in the future, you’re wrong.
“Just because a trustee agrees to do something in the future, that’s typically unenforceable. This is very unintuitive and hinges off an unintuitive area of law.”
He highlighted a number of key legal texts and cases state a trustee cannot fetter the future exercise of their powers and must exercise them according to the circumstance that exist at the time of their decision.
“If a trustee has a discretionary power and the trustee decides now as to how it will exercise that power in the future, such as paying a death benefit to a person in a particular manner, that decision is unenforceable,” he said.
“You can have a reversionary pension, but only if the trust deed allows for it,” he noted, pointing to Muir v Inland Revenue Commissioners [1966] 1 WLR 1269, 1283, which stated a trustee cannot release or fetter a power they hold unless the deed permits them to do so.
“So you need the trust deed to say there are some circumstances in which you are allowed to fetter and so a pension can be made reversionary, but only if the governing rules allow for that.”
