Earlier this week (20 April 2020) the Court of Appeal of the Supreme Court of Victoria dismissed an appeal in the ongoing Wareham v Marsella [2020] VSCA 92 war.
To refresh your Covid-19 addled minds in Re Marsella [2019] VSC 65 (McMillan J):-
- The Fund was established by deed in 2003 with deceased and her daughter from her previous marriage, as individual trustees;
- The deceased was the sole member and founder of the Fund until her death on 27 April 2016 and her member account was about $490,000.
- The deceased was also survived by her husband of 32 years who was her sole Executor;
- Importantly, the deceased did not make her husband a co-trustee;
- The daughter was left as sole trustee of the Fund and appointed her husband a co-trustee and they resolved to pay the daughter the whole of the death benefit;
- The husband got nothing;
- The husband submitted that the daughter (and her husband) did not exercise good faith and real and genuine consideration in relation to the dependants of the deceased and submitted that the death benefit payment should be set aside;
- The daughter (and her husband) submitted that the trust deed afforded them with an absolute and unfettered discretion to make the payment to the daughter, arguing that they were not required to provide reasons for their decision. Further, that under the trust deed, the trustees had a general power of appointment, which was tantamount to ownership, and for that reason, the trustees could properly decide to pay the whole of the death benefit to the daughter.
Re Marsella differs from Katz v Grossman in that the case was fairly and squarely about the actual exercise of the discretion and not about how trustees got to be there in the first place.
What went wrong for the trustees?
- McMillan J held that the daughter (and her husband) in their capacity as trustees failed to exercise their discretion with a real and genuine consideration of the interests of the Fund's beneficiaries.
- In particular, the Court singled out the daughter's behaviour for criticism, stating at [56] that her arbitrary distribution of benefits in the Fund to herself was carried out with '… ignorance of, or insolence toward, her duties.' and at [57] also stated that her conduct was beyond 'mere carelessness' or 'honest blundering'.
- Consequently, the Court held that the daughter (and her husband) were to be removed as trustees commenting at [79]: “In the context of an improper exercise of discretion, and significant personal acrimony between the first defendant and plaintiff, the defendants are to be removed as trustees of the fund.”
What made it easier for the husband, in this case, was that the husband had commenced a family provision case against the estate and the daughter had started separate proceedings claiming the family home where the husband lived was held on trust for her and was not an asset of the estate.
The Court in the family provision case handed down Judgment in June 2018 (giving the husband a flexible life interest in the home). In the process, the Court made a number of findings regarding the relationship between the husband and daughter, namely, that upon the death of the deceased the daughter exhibited a marked negative attitude toward the husband, that their relationship had broken down irretrievably and that the daughter’s evidence “tended to be jaundiced by her negative feelings toward the plaintiff (husband)”. Subsequent to this judgment, the daughter discontinued the trust proceeding.
None of this helped the daughter in that the Court was on notice about the unhappy and litigious relationship of the parties. It certainly helped the Court draw an inference that the daughter and her husband acted arbitrarily (and that consequently, they acted in bad faith).
What did the Court of Appeal have to say?
Without any hesitation at all, they said that Justice McMillan got it right. Particularly (at 62) they said:-
“On balance, the inference to be drawn from the evidence is that the first defendant acted arbitrarily in distributing the fund, with ignorance of, or insolence toward, her duties. She acted in the context of uncertainty, misapprehensions as to the identity of a beneficiary, her duties as trustee, and her position of conflict. As such, she was not in a position to give real and genuine consideration to the interests of the dependants. This conclusion is supported by the outcome of the exercise of discretion.”
The decision confirms that the job of a beneficiary (with an axe to grind with or without good reason) is made very easy if trustees (including SMSF trustees) do not act very carefully when making decisions.
All trustees are held to very high standards. They must properly inform themselves. They must also act in good faith, for proper purposes and give real and genuine consideration in everything they do.
If trustees don’t get it right decisions like (who gets a death benefit) can be reversed (or at the very least there can be years of litigation as was the case in Marsella). They can even be removed as trustees under the Court’s inherent jurisdiction. Both of these things happened in Marsella.
Things may have been very different if specialist advice had been obtained at a very early stage. The Court of Appeal said they were not satisfied that specialist legal advice had been obtained. Certainly a lot of legal costs may have been avoided if it had been.
For more information please go to my 2019 Article Absolute Discretion and the disappointed beneficiary https://www.connollysuthers.com.au/absolute-discretion-and-the-disappointed-beneficiary/