Self-Managed Superannuation Funds or 'SMSF's" have become increasingly popular throughout Australia. Like a traditional superannuation plan, an SMSF involves the management by a trustee of capital and contributions from plan members for retirement purposes.
In a traditional superannuation plan, a super fund often operates as a trust. The trustee is responsible for the operation of the fund and has an obligation to formulate and implement an investment strategy. A trustee is liable for breaches of these obligations. Traditional superannuation plans often have thousands of members in their plans. Trustees for these plans usually have backgrounds in finance and are often some of the best money-managers in the country. The trustees are experts in compliance with the laws and utilise the latest industry resources and personnel to ensure that they are fluent with tax and other regulatory issues concerning the fund.
What separates an SMSF from a traditional superannuation plan is that in an SMSF, the members are also the trustees. The trustee/members are often (but not always) lay-people who are endeavouring to manage their own super fund. Despite the lack of professional designation, a lay trustee of an SMSF is held to the same high regulatory and fiduciary standards in their control and administration of a fund as the trustee of a large superannuation scheme. This can create complexities for lay-people in their role as trustee.
The recent Victorian Supreme Court case of Wooster v. Morris illustrates the demands on a lay SMSF trustee. In that case the deceased died leaving an SMSF with a binding death benefit nomination directing his superannuation in favour of his two children from a first marriage. The trustee of the SMSF upon his death was his second wife. The second wife was now the trustee over the beneficial funds for her late Husband's children from his first marriage.
Rather than simply paying the binding death benefit nomination to the step-children, the trustee instead opted to contend that the binding death benefit nomination to the children was invalid. She then paid the death benefit under the SMSF to herself instead of the children.
If she had been correct in her assertion that the binding death benefit was invalid, she would have had discretion to disburse the funds as she saw fit (including distributions to herself).
Predictably, the children contested the distribution and the step-mother trustee eventually conceded that the death benefit to the children was binding. Ultimately, because of the delays and litigation caused by the step-mother trustee's actions, she was ordered by the court to not only pay the children their death benefit under the SMSF but also accrued interest and their substantial legal costs. In making those orders, the court ruled that the trustee had not acted as an "objective and dispassionate" trustee.
The lesson to be learned from this matter for SMSF trustees is that they have a duty to act with impartiality and in the interests of the beneficiaries (not in their self-interests). The penalties for failing to act fairly and impartially can result in expensive litigation and the imposition of personal costs orders.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.