Estate Planning

SMSF trustees: lessons for the blended family

B2B Editor27 February 2014

SMSF trustees: lessons for the blended family

In Wooster v Morris [2013] VSC 594 (1 November 2013), the trustees tried to say that a binding death benefit nomination or BDBN did not bind them. They had to pay the death benefits and the cost of the court proceedings which came out of the remaining member’s account.

The family in this case was a blended family. The deceased had two daughters from his first marriage and he made a BDBN in their favour. His second wife was the surviving trustee. She sought legal advice about the BDBN and was told it did not meet all the requirements of the deed because it was not served properly after it was made.

The SMSF had a total amount to pay members of $1,376,157 with the deceased’s interest totalling $924,509 and the interest of the second wife totalling $451,648. The trustee determined to accept the advice of the defect in the making of the BDBN and concluded that it was not binding. The trustee then paid the death benefit to the second wife and of course she was the sole director of the trustee company.

As the dispute proceeded, the trustee eventually conceded that the BDBN was binding and the death benefit should therefore be paid to the two daughters of the deceased. However, it seems that the first payment to the two daughters was an amount of $600,665 and the accountant was heavily criticised for the preparation of accounts. So the court ordered that the trustees pay the balance of $323,845.

But the two daughters of the first marriage seemed to be a bit cranky at this point. They claimed interest on the amounts outstanding at the penalty interest rate. The second wife as trustee said they have had the money invested in the SMSF and have the taxation benefits so penalty interest should not apply. The court said that because the second wife had resisted and defended the proceedings, penalty interest should apply.

And the two daughters of the first marriage went further. They claimed costs of the litigation should be paid personally by the second wife. The court made the point that the second wife’s role was not that of an objective and dispassionate trustee. In a SMSF, if the second wife exercised her trusteeship power, she would personally benefit.

To quote the judge:

The paramount duty of a trustee is to ‘exercise [its] powers in the best interests of the present and future beneficiaries of the trust, holding the scales impartially between different classes of beneficiaries’.

This case is a salutary lesson. Trustees of a SMSF have a responsibility as trustees and must act impartially. And blended families raise particular issues because alliances may form against new entrants into the family group. Bitterness and acrimony can be the result played out in very expensive litigation.

Stephen Bourke is a director in the boutique firm, Certus Law, specialising in superannuation, trusts and estate planning. He also consults to other practitioners through the consulting practice, SuperSplitting. Level 5, 28 University Avenue T: 6268