- The Marsella case changed forever how SMSF trustee discretion is exercised.
SMSF Trustee Discretion: The Marsella Case
Before the Marsella case it all depended on a valid binding death benefit nomination. If there was none, SMSF trustee discretion knew no limits. A trustee could pay the death benefit to whomever, including themselves. The Marsella v Wareham case changed all this.
How, Paul Mackenroth of Cleary Hoare in Brisbane will tell you in this episode. Here is what we learned but please listen in as Paul explains all this much better than we ever could.
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Marsella v Wareham (No 2)  VSC 65
When an SMSF member dies, the remaining trustees decide whether and to what extent the deceased’s super goes to which SIS dependant or – otherwise – the estate. They usually have absolute and unfettered discretion, unless there is a binding death benefit nomination (BDBN).
But what happens if the trustees abuse this discretion for their own benefit and disregard other SIS dependants? So far there had been very little case law, until now. The Marsella v Wareham case provides much needed guidance.
How It Started
The Marsella v Wareham case starts like so often in these cases with a second spouse and children from a first marriage. Riccardo Marsella and Helen Swanson had married in 1984, when Helen’s 2 children from her previous marriage – Caroline Wareham and Charles Swanson – were 12 and 14 years old respectively. The children’s father had died in a motorcycle accident.
Helen had a sole-member SMSF with her daughter Caroline as second trustee. Helen had nominated her grandchildren in a binding death benefit nomination (BDBN). But this nomination had expired and was invalid anyway, since grandchildren don’t qualify as SIS dependants.
All was well. And then Helen died. She died on 27 April 2016 with around $450,000 in super.
Caroline, as the surviving trustee, appointed her husband Martin as co-trustee, paid the death benefit to herself and then immediately wound up the fund.
Caroline’s brother and especially her step-father Riccardo received nothing from Helen’s super. So Riccardo went to court. And the question the court had to decide was whether Caroline acted within her legal obligations as a trustee. How much discretion does the surviving trustee have? Can they just take it all as Caroline did and ignore other SIS dependants?
And so far the answer had been, “Probably Yes”. Until this case, courts had refrained from questioning how a trustee exercised their discretion. That is why in the past very few plaintiffs attacked the exercise of discretion itself. Instead they attacked other elements, for example the appointment of the trustee or whether a death benefit nomination was binding or even valid at all.
And so Caroline’s solicitors just reflected that view when they asserted in a letter to Riccardo’s solicitors:
“You will know that a discretionary trustee is not required to give reasons for any decision and our client does not do so. You have asserted no foundation for an improper exercise of discretion….The trustee is permitted to exercise their discretion, to any eligible object, which includes herself. Our client owes no duty to the estate or other beneficiaries …“.
And they were right, until they were no longer right. This case changed this very point. This is the first case where a plaintiff successfully attacked the exercise of discretion itself.
So this is the famous Marsella case: Marsella v Wareham (No 2)  VSC 65. For the first time a court – Justice McMillan – noted that the trustee, when exercising discretionary power, has
“a duty to exercise the power in good faith upon real and genuine consideration and for the purposes for which the power was conferred“.
The Court found that the trustees had a duty to consider Riccardo. They rejected an assertion that he had “no interest” in the fund and found that being a “potential object of the exercise of discretion” i.e. a potential recipient of a death benefit, gave Riccardo an interest in the fund.
“While it is not the Court’s role to consider the fairness or reasonableness of the outcome of the exercise of discretion and usurp the role of the trustee, the outcome itself, particularly where the result is grotesquely unreasonable, may form evidence that the discretion was never properly exercised, or was exercised in bad faith.”
The Court came to “the conclusion that there was a lack of real and genuine consideration“.
All this sounds very much like considerations of a family provision claim.
The Court removed Caroline and her husband as trustees, overturned the fund’s decision to pay the entire death benefit to Caroline and ordered the appointment of a new trustee.
So the legacy of this case is that SMSF trustees no longer have a wild card for the payout of death benefits when there is no binding nomination.
However – as before – the courts will not consider whether a trustee’s decision was correct or fair. Whether a particular person should have received more or less. But the courts will consider from now on whether the process taken to reach that decision was consistent with the trustee’s legal obligation to act in good faith.
So a trustee’s discretion will probably move closer to the rules for family provision claims. Trustees will need to act as if they were a judge in a family provision claim, considering the relative merits of each potential beneficiary – the deceased’s children and spouse – including their financial circumstances.
This is the SMSF part of the Marsella v Wareham case. In the next episode Paul Mackenroth will discuss Riccardo’s family provision claim.
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Last Updated on 17 August 2020