It is a long accepted principle of law that the trustee of a discretionary trust has a wide discretion to determine when and how to make distributions of income or capital to the beneficiaries of the trust.
Similarly, since the decision of Katz v Grossman [2005] NSWSC 934 in 2005, the accepted view has been that in the absence of a binding death benefit nomination, the trustee of an SMSF has discretion to determine how a deceased member’s superannuation benefits are to be paid, including the discretion to pay the benefits to themselves (assuming they qualify as a dependant).
In both situations, while the Courts have historically acknowledged the need for the trustee to consider all potential beneficiaries in making its decision, it has been largely impossible for a disgruntled beneficiary to challenge the ultimate determination of the trustee.
Remarkably, we have now had two judgements in less than a year in which a disgruntled beneficiary has successfully had unfavourable trustee decisions unwound.
Family trusts
Trani v Trani [2018] VSC 274 involved distributions made by the trustee of a discretionary trust.
In brief:
- The family trust was controlled by three siblings (a sister and two brothers) and had a corporate trustee. The siblings had effectively inherited control of the trust from their parents
- The three siblings were joint appointors and were all directors of the corporate trustee. One brother was the sole shareholder of the corporate trustee
- The sister had a falling out with her brothers, who decided to exclude her from the trust. To achieve this, the brother who was the sole shareholder of the corporate trustee removed her as a director
- Once she has been removed as a director, the two brothers (as the remaining directors of the corporate trustee) then took steps to liquidate the assets of the trust, distribute the proceeds to themselves and wind up the trust
The sister successfully argued before the Victorian Supreme Court that the decisions made by the corporate trustee to distribute income and capital to her brothers (and in doing so, to exclude her from the distributions) were made in bad faith.
The outcome is somewhat astonishing given the trustee of a discretionary trust is not obliged to disclose its reasons for its decisions, even where that decision is challenged in the Courts.
Here, the Court was satisfied based solely on circumstantial evidence that the corporate trustee’s decisions had been made in bad faith and for an improper purpose and ordered that one-third of the trust fund be held on a constructive trust for the sister.
Self-managed superannuation funds
A similarly surprising outcome was reached in Re Marsella [2019] VSC 65.
The facts in Marsella were as follows:
- The deceased had a husband and two children from a previous relationship
- She had been the member and trustee of an SMSF, with her daughter as the co-trustee
- She did not have a valid binding death benefit nomination at the date of her death (she had signed a nomination years earlier however it nominated invalid beneficiaries and had lapsed)
- Upon her death, her daughter (as the sole remaining trustee) appointed her husband as co-trustee and resolved to distribute the deceased’s superannuation benefits to herself, to the exclusion of her brother and her step-father
The deceased’s husband challenged the distribution and again, argued that the decision had been made in bad faith and was not based on a real and genuine consideration of the needs of the eligible beneficiaries (being the deceased’s dependants).
The facts were largely analogous to Katz v Grossman, which concluded that the trustee had the discretion to pay the superannuation benefits to herself to the exclusion to her brother.
By contrast, in Marsella the Court agreed with the deceased’s husband and found that the trustees had not acted in good faith.
The Court expressly rejected the trustees’ submissions that they had a full and unfettered discretion in relation to the proposed distribution and ordered the removal of the trustees.
Both cases highlight the need to ensure specialist advice is obtained before decisions are made to distribute income or capital of a trust or death benefits from an SMSF, particularly where a disgruntled beneficiary may subsequently seek to dispute the determination.
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