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Good faith principle to gain importance

SMSF death benefits

Determining whether SMSF trustees have acted in good faith when determining how death benefits are distributed is likely to become more common.

A specialist lawyer has predicted the element of good faith will have increasingly more prominence in the distribution of death benefits upon the passing of SMSF members.

Speaking at the Self-managed Independent Superannuation Funds Association 2022 SMSF Forum in Melbourne last week, Nathan Yii Lawyers principal Nathan Yii noted: “We will see more [consideration given to good faith] in the next however many years when people start passing away with a lot of money in superannuation.”

Specifically, Yii was referring to situations where SMSF trustees exercise their discretion in deciding which individuals will be beneficiaries when a member dies.

“[Recent case law has shown] it’s not just about paying out death benefits in whatever way you choose, you do need to [take some extra steps] to ensure discretion is exercised in good faith,” he said.

According to Yii, judgments such as that handed down in the Marsella case are evidence courts are increasingly taking this element into account.

“Whether you agree with these cases or not, it is the law at the moment so you just need to be aware of these things. I should also say that the good faith issue has always been around, particularly in the context of discretionary trusts, [but] it’s only recently come to the fore in the context of SMSFs,” he noted.

The Marsella case saw the SMSF trustees exercise their discretion to allocate the death benefits of the fund to themselves, ignoring any consideration the deceased’s husband deserved in the process because he was neither a trustee nor beneficiary of the fund.

“[The judge determined] this was incorrect and the court mentioned this because if you look at the beneficiary throughout the terms of the deed, the definition of beneficiary includes any potential beneficiary who could receive those death benefits and that included [the husband],” Yii revealed.

“So what her honour did at trial was remove the trustees and said that the discretion was not exercised in good faith [because] they didn’t consider the relationship that the husband and wife had for some 20-odd years, and [ruled] it was a grotesquely unreasonable outcome.”

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