See part 1 for a more detailed background to this case.

Background

The SMSF’s members were husband and wife who did not have children. The husband passed away in September 2014, leaving the wife as the sole member and director of the corporate trustee of the SMSF.

The wife met an American man on a cruise, and they formed a (long-distance) relationship. While they each lived in their own countries, they continued to spend time together, and the deceased described him as her partner. She included the partner in her will, gifting him $1 million, a Lexus car, furniture and artworks, and a life estate in her Clontarf home.

Under a binding death benefit nomination (BDBN) signed a week before she died, she nominated her legal personal representative to receive 100 per cent of her superannuation to her estate; however, it was missing the second witness signature and was held to be invalid. Presumably, this was on the basis that the SMSF trust deed required two witnesses.

NSW Trustee and Guardian (NSWTG) was the surviving executor of her estate. NSWTG engaged a chartered accountant and registered liquidator, Mr Heesh, to administer and wind up the SMSF and act as its sole director.

Mr Heesh sought legal advice and commenced an extensive claim staking procedure, under which he received information and submissions from NSWTG (as executor of the deceased estate) and partner. He also had extensive communications with the partner via their respective lawyers.

Court advises that SMSF trustee’s exercise of discretion was justified

Here, as the BDBN was invalid, the SMSF trustee (effectively, Mr Heesh) had the discretion to decide who would receive the death benefits. As noted above, ultimately, Mr Heesh, as director of the SMSF trustee, resolved to pay one-third of the death benefits to the partner of the sole surviving SMSF member and two-thirds to her estate. The trustee asked the court whether it was justified in making that decision.

For the reasons outlined below, the court advised that the trustee was justified in making that decision.

No reasons were given

The partner argued that the court should decline to provide advice on this point because the trustee failed to give reasons for its proposed decision in relation to the death benefit.

In rejecting this argument, the court confirmed the long-held positions in relation to reviewing trustee decisions:

• The exercise of the trustee’s decision must be made in good faith, upon real and genuine consideration, and in accordance with the purposes for which it was given.

• It is not the role of the court to assess the fairness or reasonableness of the trustee’s decision (unless the decision is so extreme and without any justification – i.e. grotesquely unreasonable).

• That trustees are not required to provide reasons for their decisions.

• That non-disclosure of reasons does not mean that the exercise of the trustee’s discretion can be reviewed.

• The extent of the trustee’s duty to inform itself of the facts depends on the particular circumstances, including the nature of the trust.

• The duty of the trustee of a super fund to inform itself is more intense when compared to a discretionary trust with a broad class of beneficiaries.

The independence of the trustee

The partner argued that Mr Heesh was not independent because he was appointed by NSWTG, being the executor of the estate and a potential beneficiary of the death benefits.

The court noted that no evidence supported this argument. The court noted that the evidence suggested that the trustee took steps to properly exercise its discretion, including obtaining legal advice to understand and comply with its obligations and the terms of the trust deed, contacting eligible recipients, and seeking full information about their circumstances (i.e. claim staking).

The court found the trustee had given real and genuine consideration to the decision. This included evidence from Mr Heesh’s time sheets that showed he repeatably turned his mind to the decision and appeared to have “agonised” in coming to the proposed decision.

The court also found that Mr Heesh’s working with the NSWTG in relation to contacting the ATO to sort out the complying trustee issue did not indicate a lack of independence in making the proposed death benefit decision as he sought and acted on advice obtained from the lawyers for the corporate trustee.

Should death benefits be paid preferably to dependants

While it has been the view of some people in the superannuation industry that death benefits should be paid in priority to dependants in preference to, or to the exclusion of, the estate, this argument was rejected by the court. The court noted that whether such preference should or should not be given depends on the particular circumstances that confront the trustee, including the trust deed.

The partner also argued that the partner should be preferred over the estate because he would receive the death benefits tax-free, whereas it would be taxable to the estate (at least in part). The court rejected this argument also and noted that the payment of tax on a death benefit is not, of itself, a good reason not to pay a death benefit to a beneficiary. The court also noted that there was evidence that the trustee took into account the tax consequences of the death benefit when making the proposed decision.

Conclusion – run a proper death benefit decision process

The above analysis supports the recent run of cases (e.g. Marsella and Owies) that death benefit discretionary decisions must be conducted in the proper manner. This includes the trustee properly informing themselves (i.e. a claim staking process) and acting in a proper and considered manner.

The case is also an important reminder that there are no default decisions (e.g. the misguided belief that death benefits must be paid to dependants as a priority) and that each decision must be decided on its facts and under the trust deed of the trust.