These cases are sure to have an increasing impact on death and succession planning in an SMSF context as around 70 per cent of SMSFs are two-member funds and, in relation to couples, each spouse typically appoints their spouse as executor of their estate. Accordingly, many surviving spouses may thrust into a position of potential conflict in relation to their duties as an SMSF trustee\director and as an executor.

McIntosh v McIntosh – administrator was held to be conflicted

McIntosh v McIntosh [2014] QSC 99 (McIntosh) involved a mother who was appointed as the administrator of her deceased son’s estate. While acting in that role, the mother also applied to three of her son’s industry/retail super funds to receive his death benefits in her personal capacity, which she received. If these death benefits had instead been paid to the estate they would have been distributed equally between her and her former husband (as the deceased parents) under the laws of intestacy in Queensland as their son died without a will.

After some legal posturing between the mother’s and the father’s lawyers, the mother filed an application in the Queensland Supreme Court to determine the matter which found:

… there was a clear conflict of duty … contrary to her fiduciary duties as administrator. When the mother made application to each of the superannuation funds for the moneys to be paid to her personally rather than to the estate, she was preferring her own interests to her duty as legal personal representative to make an application for the funds to be paid to her as legal personal representative. She was in a situation of conflict which she resolved in favour of her own interests. As such she acted … in breach of her fiduciary duty as administrator of the estate …

Accordingly, the mother was required to account to the estate for the super benefits she had personally received. Also of note was in this case was the fact that the mother was a nominated beneficiary in respect of each of the super funds via non-binding nominations. Had binding death benefit nominations (‘BDBNs’) been in place, no conflict would have arisen. For further analysis of this case click here.

Brine v Carter – executor was held not to be conflicted

Brine v Carter [2015] SASC 205 examined a potential conflict arising in the case of an executor which did not require the executor to account to the estate. Professor Brine had appointed his three children and Ms Carter, his de facto spouse, as the executors of his estate. Professor Brine had two super accounts/pensions in the same industry super fund. As one pension had no residual value and could only be paid to his surviving spouse, the dispute related to the remaining pension, which could be paid to a dependent or the legal personal representative (deceased estate). Professor Brine had completed a non-binding death benefit nomination in favour of his legal personal representative to receive this pension amount.

Ms Carter applied to the super fund trustee to receive the benefits in both accounts in her personal capacity.

Ms Carter had previously represented to the other three executors on multiple occasions that the estate was not an eligible beneficiary of the super benefits. However, after making their own enquiries, the deceased’s three children found out that they could claim the death benefit on behalf of the estate and proceeded with this claim.

The super fund trustee then exercised its discretion to pay both pension benefits to Ms Carter and the remaining executors formally disputed this decision. Due to her conflict, Ms Carter recused herself from any discussions or actions relating to the dispute notice issued to the fund trustee by the executors and did not object to it but remained an executor. Ms Carter in fact made further submissions to the trustee in her personal capacity claiming the benefits.

After the super fund trustee affirmed its decision and other dispute processes provided no further recourse, the remaining executors applied to the South Australian Supreme Court for an order that Ms Carter account to the estate for these benefits. The court found that:

• Ms Carter was in a position of conflict regarding her duties as an executor.
• Ms Carter’s appointment as an executor via the deceased’s will, while providing some acknowledgement by the deceased of a conflict, was not by itself sufficient to overcome her position of conflict. Rather, a specific conflict authorisation was required.
• As the other executors claimed the super benefits on behalf of the estate and had full knowledge about their rights prior to the super fund trustee’s decision, they effectively consented to Ms Carter claiming the benefits in her personal capacity despite her conflict. From that point, Ms Carter did not act in breach of her duty as an executor as there was no connection between her breach and the benefit she received.
• Ms Carter was not required to account to the estate.

Brine v Carter provides a particular set of facts that resulted in a somewhat incongruous outcome that allowed an executor to apply for and receive death benefits in her personal capacity despite a potential conflict arising. The court noted that had the other executors not been aware of Ms Carter’s application, and had they also not made an application on behalf of the estate, Ms Carter would have been liable to account to the estate. This outcome was therefore due to the particular facts in this case. In many other factual scenarios, the conflict could easily have resulted in the spouse having to account to the estate.

Burgess v Burgess – sacred trustee obligations

In Burgess v Burgess [2018] WASC 279 Mr Burgess died without leaving a will in May 2015 and was survived by his wife and two minor children. A year after his death, Mrs Burgess applied to become administrator of his estate and was appointed on 27 June 2016.

Mr Burgess had super benefits in four large public offer funds and Mrs Burgess made a claim to two of those funds to be paid her deceased husband’s death benefits. She applied for and received benefits from one fund prior to her appointment as administrator and applied for and received benefits from another fund after her appointment.

Mr Burgess’ estate (including any super paid to the estate) would be split among Mrs Burgess and their two young children. By the time of hearing, one super fund had paid benefits to the estate. The fourth fund had not yet made any payment and Mrs Burgess had not made any application to it. Further, there were no BDBNs in place in relation to any of the funds.

Due to the uncertainties, Mrs Burgess herself made an application to the Western Australian Supreme Court. Ultimately, the court followed the principles in McIntosh and found that:

• Mrs Burgess would retain the benefits from the first super fund, as she was not an administrator at the time of application and thus no conflict had arisen in relation to the first fund.
• Mrs Burgess was required to account to the estate for the benefits applied for and received after she was appointed. There was a conflict of interest and as administrator she was bound to claim the benefits on behalf of the estate after she was appointed administrator.
• Mrs Burgess was bound to claim the remaining super benefits on behalf of the estate.

The court’s comments in Burgess demonstrate the strict fiduciary obligations placed on an executor or administrator. Martin J explained Mrs Burgess’ obligations at para [84] as follows:

In an age of increasing moral ambivalence in western society the rigour of a court of equity must endure. It will not be shaken as regards what is a sacred obligation of total and uncompromised fidelity required of a trustee. Here, that required the administrator not just to disclose the existence of the (rival) estate interest when claiming the superannuation moneys in her own right from the fund trustee. It required more. It required her to apply as administrator of the estate for it to receive the funds in any exercise of the fund trustee’s discretion.

Martin J gave the following comments at para [85] regarding the fiduciary duties of an executor:

The interests of a deceased estate require a “champion” who cannot be seen (even if they are not) to be acting half-heartedly, or with an eye to achieving outcomes other than an outcome that thoroughly advances the interests of the estate - to the exclusion of other claimants.

Martin J made the point that the undesirable outcome in this case might have been avoided had Mr Burgess made a will that explicitly contained a conflict authorisation or if he had signed BDBNs in relation to his super benefits. In lamenting the outcome Martin J at para [91] stated:

The result is, of course, messy for the family and less clear cut than might otherwise have been desired. However, that is a result of wider trustee integrity policy principles of the law which take effect and prevail. They are of vital importance and are applicable to universal circumstances extending well beyond the present rather regrettable factual situation. The present is a situation, I reiterate, that might have been avoided by the two measures I earlier mentioned.

Other important cases

In the case of Re Narumon [2018] QSC 185 the court considered whether attorneys under an enduring power of attorney (EPOA) could validly execute both a BDBN confirmation/extension as well as a new BDBN on behalf of a member. Whether an attorney will have such power will depend on the SMSF governing rules, the EPoA document, the relevant powers of attorney legislation in the applicable state/territory and the federal superannuation legislation.

In Re Narumon the member (Mr Giles) became incapacitated and his attorneys under an EPoA, his wife, Mrs Giles, and his sister, Mrs Keenan, purported to both extend a prior lapsed BDBN and to execute a new BDBN, both of which provided for death benefits to be paid to them. The EPOA document did not expressly authorise the attorneys to enter into a conflict transaction. The Court found that the extension of the prior BDBN was valid since:

• The fund’s governing rules allowed the prior BDBN to be confirmed and provided that any power or right of a member could be exercised by an attorney;
• While the EPoA document did not expressly deal with superannuation matters, the meaning of “financial matters” in the relevant (Queensland) legislation was wide enough to cover superannuation; and
• While a ‘conflict transaction’ entered into by an attorney can invalidate a transaction, the confirmation of the prior BDBN was not a conflict transaction.
• While the BDBN benefited the attorneys it was found not to amount to a conflict as it simply ensured the continuity of Mr Giles’ prior wishes.

However, the new BDBN executed by Mrs Giles and Mrs Keenan was found to be a conflict transaction as it provided for a different payment of death benefits which slightly benefited Mrs Giles more than the extended BDBN. Thus, the new BDBN was invalid. 

In the case of Re Marsella; Marsella v Wareham (No 2) [2019] VSC 65 the deceased’s daughter, who was also a co-trustee, was ordered to repay death benefits back to the fund and was removed as a trustee along with her co-trustee husband for acting “grotesquely unreasonable” in conflict of her trustee duties and in bad faith. This case explores the high legal standards placed on SMSF trustees and highlights the need for careful attention to SMSF succession planning. For a detailed analysis of this case and its lessons click here.

SMSFs

It is important to consider the impact of these cases from an SMSF perspective as it is typical for the spouse of a deceased SMSF member to also be an executor or administrator of that member’s estate. In such a situation, a potential and real conflict may arise between the executor/administrator’s obligations as trustee of the estate and their desire to receive superannuation death benefits in their personal capacity.

These cases reiterate the importance of planning for death and SMSF succession. In all cases, the conflict difficulties would likely have been avoided had the deceased had a will with appropriate conflict authorisations and/or BDBNs were in place to remove the trustee’s discretion as to whom death benefits could be paid.

In any super death benefits matter, advisers and trustees should ensure that applications to receive benefits are not made without first considering, among other things, the possible conflict implications. Moreover, advisers should recommend that their clients proactively implement SMSF succession and death benefit strategies that ensures the surviving spouse is not placed in a position of conflict that could undermine their ability to receive their spouse’s death benefits. This might involve special provisions in wills, EPoAs, BDBNs, death benefit deeds and other legal documents.

Conclusion

This line of cases illustrates that the courts treat the fiduciary duties of an executor/administrator in a strict and sacred manner. Further, the courts will uphold these obligations despite what might be seen as a strict and inflexible approach resulting in an unfair outcome.

Shaun Backhaus, lawyer and Daniel Butler, director, DBA Lawyers