I’m free to do what I want any old time*

The discretionary decision making freedom of a trustee is a well accepted legal principle, that the Courts have been reluctant to interfere with.

Whilst trustees have always been bound by the fiduciary character of their role, the Courts have historically upheld the broad discretion of trustees to make decisions in relation to trust property, and distributions of income and capital. It is also generally accepted that this discretionary freedom extends to trustees of an SMSF to determine how a deceased member’s superannuation death benefits are to be paid.

However, two recent Victorian cases have highlighted the importance for trustees to live up to their name and embody the nature of the word ‘trust’ by demonstrating good faith, genuine consideration, responsibility, protection and loyalty towards beneficiaries.

In Trani v Trani [2018] VSC 274, a falling out between siblings in control of a family trust resulted in two brothers removing their sister as a director of the corporate trustee, liquidating the assets of the trust, distributing the proceeds to themselves (to the exclusion of the sister) and winding up the trust. 

The sister successfully argued that the exercise of the trustee’s discretion by the brothers in making these distributions was made in bad faith and for an improper purpose, and it was ordered that one-third of the trust fund was to be held on a constructive trust for the sister. The amazing aspect of this case was that it was determined on the basis of circumstantial evidence only, the corporate trustee having immunity from disclosing reasons for its decisions.

In Re Marsella [2019] VSC 65, the facts are somewhat analogous to the original and leading case in this area, Katz v Grossman [2005] NSWSC 934. The deceased was survived by her husband of 32 years and two children from a previous relationship. She had been the member and trustee of an SMSF, with her daughter as the co-trustee.

Upon her death, her daughter (as the sole remaining trustee) appointed her husband as co-trustee and resolved to distribute her mum’s superannuation death benefits entirely to herself, to the exclusion of her brother and her step-father. The deceased’s husband challenged the distribution on the basis that the decision had been made in bad faith and without real and genuine consideration of the needs of the eligible beneficiaries (being the deceased’s husband and two adult children).

The Court agreed and found that the trustees had not acted in good faith or with authenticity, and the daughter’s decisions had been made in ‘ignorance of, or insolence toward, her duties’. The Court set aside the trustees’ decision, and ordered the removal of the trustees from their positions.

The cases highlight the importance of reviewing family trust and SMSF succession arrangements as part of an estate planning engagement, and ensuring specialist legal, financial planning and accounting advice is obtained.

* ‘I’m Free’ by the Rolling Stones was the final song released on their Out of Our Heads album in 1965, (or us youngsters may be more familiar with the cover version by The Soup Dragons in 1990).

If this article has raised questions for you, the team at Partners Legal can help.  
This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.