Succession Planning

“Who holds the trust’s purse strings upon death or loss of capacity of a trustee?”

(or, What happens when the Brady Bunch is left to haggle over the leftovers)

Despite market blips and near catastrophes over the past twenty or so years, a generation has risen to previously untold riches based upon the rapid accumulation of wealth arising from property and share investment. Since around 1993 one of the most popular vehicles for such investments has been the self-managed superannuation fund (‘SMSF’), typically set up for and controlled by “mums and dads” investors who generally lack skill and experience in trust formation and administration.

Regrettably the reliability of terms of trust deeds providing for the control and management of these funds and, importantly, to whom that passes upon death or disability of one of the trustees is usually only tested when the beneficiaries are in heated dispute and, of course, when one of the trustees is dead or incapacitated with the result that control over the assets remains in the surviving trustee.

It is often the case that not a great deal of thought was put into planning for future events such as the death or disability of a trustee. We have found ourselves recently involved in proceedings in which control of the SMSF following the death of one of the trustees had not been planned well enough in advance, if at all.

Add to that, the increasingly common prospect of a second marriage and competing claims by step-siblings and you have the real prospect of a significant and costly dispute over control and ultimate distribution of the deceased’s interest in the fund.

In the recent case of Wooster v. Morris [2013] Victorian Supreme Court 594 [November 1 2013]:  

  • The fund was established in 2005, the trustees being the deceased and his second wife, M - both of whom were the only members of the fund;
  • each beneficiary had pension benefits and accumulation benefits in the fund;
  • in March 2008 the deceased made a binding death benefit nomination (‘BDBN’) in favour of his daughters from a previous marriage (the plaintiffs in the proceeding);
  • the deceased died on February 2010. As at June 30, 2010 the fund had assets of $1,376,157.18, with the deceased’s interest totaling $924,509.37 and that of M totaling $451,647.81;
  • the deceased’s daughters were executors of his estate, while the only surviving trustee of the fund was M;
  • M appointed her son from a previous marriage as co-trustee and in due course the trusteeship was transferred to a company of which M was the sole director and shareholder;
  • in the exercise of its broad discretion that trustee decided to pay none of the deceased’s death benefits under the BDBN but instead pay the entire death benefit to M.

[Note: a BDBN is binding upon trustees of the fund once delivered to them. It must be followed no matter how the beneficiary’s circumstances have changed. For example, unless expressly changed, cancelled or expiring in accordance with its terms, the nomination of a husband or wife as the recipient of the benefit will bind the trustee notwithstanding that the parties may have separated and even divorced unless, for example, provision is made in Family Court orders]  

The plaintiffs understandably commenced proceedings seeking various declarations and other orders. While a number of issues were determined in the case, the most significant for present purposes come down to the following four issues. 

1. Is the BDBN binding on the trustees of the fund? 

The Court found that the BDBN was indeed valid and binding upon the trustee of the trust. In this case the surviving trustee had disregarded the BDRN, deciding instead that the entire pension and accumulated benefits accruing to the benefit of the deceased be paid to M. Thereafter it took all of three and a half years, and costly intervention of the Supreme Court, for the deceased’s daughters to actually obtain the money allowed them by their father under the BDRN.

2. Executors do not replace the deceased as trustee of the SMSF.

While this should be clear, it is often simply overlooked in trust and estate planning. From the outset - from the time when the terms of the trust deed are drawn up- care must be taken to appropriately distribute the power to appoint a trustee upon death or loss of capacity of a trustee/beneficiary.

For example, in Wooster the trust deed could simply have provided for the deceased’s executors to replace him as trustee of the fund, without consent of the other members – resulting of course in them taking control of it. 

3. What is provided in the event of death or incapacity of a trustee? 

  • Clear provision must be made for prompt and effective replacement of a deceased or incapacitated trustee. Alternatively, it may simply require appointment of an independent trustee also replacing the survivor;
  • Trustees and beneficiaries should ensure that the trust deed is reviewed and updated to reflect the trust purposes and provides appropriate powers for nomination of beneficiaries – in this case by BDBN – or reversionary benefit nomination;
  • Corresponding deeds – such as the will or BDRN – must be reviewed to ensure that they correspond fluently, rather than conflict or give rise to disputed interpretation.

4. Fiduciaries are obliged to avoid any reasonably possible conflict between their duties and their interests

This should be self-evidence and is a fundamental consideration for any trustees and other fiduciary. Their conduct of trust affairs must be in the interest of beneficiaries according to their entitlements under the trust terms, so that the trustee cannot place his or her own interests ahead of their overriding duty to all beneficiaries. In the case the judge acknowledged the “risk inherent” for trustees of an SMSF, as both beneficiaries and trustees of the trust.

However, in Wooster it was considered that this only served to heighten the degree of care to be taken not to favour her own interests over those of the other beneficiary. Indeed, the trustee lost its right of indemnity in the case as a result of it being found to have acted in the interest of the widow (who controlled it) as in doing so it failed to act impartially.

These issues should be of interest to all practitioners dealing with SMSFs. Contact us to arrange for a review of trust and related deeds.

Trumble Szanto Lawyers

Please note: This material is for general educational purposes and is not designed to be advice to any particular person in relation to their own affairs as it does not take into account the circumstances of you as an individual. We do not represent, warrant, undertake or guarantee that the use of guidance in this paper will lead to any particular outcome or result.