Court case an estate planning lesson for blended families
A dispute over an SMSF heard by the Victorian Supreme Court has further highlighted some of the complications that can arise with estate planning for blended families and SMSFs, says a law firm.
Townsends Business and Corporate Lawyers said the case Ainsworth v Davern, heard by the Victorian Supreme Court, has further illustrated the care with which SMSFs involving blended families need to be handled.
The case involved the Davern Family Super Fund which was set up in September 2013 by Kevin Davern. Mr Davern and his second wife Elizabeth Ainsworth were the trustees and Mr Davern was the only member.
In June 2008, Mr Davern adopted a new deed for the SMSF and the new deed named him as the sole trustee of the SMSF.
Townsends said it is not clear why Ms Ainsworth ceased to be a trustee or why only Mr Davern was involved in the amendment process and not both Mr Davern and Ms Ainsworth in their capacities as trustees.
“It may have been the case that the amendment power was conferred solely on the members of the fund, in this case being Kevin,” Townsends explained.
In December 2014, Mr Davern made a binding death benefit nomination under the terms of the 2008 deed. The nomination was solely in favour of Ms Ainsworth his second wife.
Mr Davern then died in April 2016. Probate of his will was granted to the executor of the will, Matthew McCrory, who was not a member of the family.
The terms of the will provided that a $50,000 legacy be paid to Matthew. From the remaining assets in the estate, 50 per cent was to be given to Elizabeth, while the other 50 per cent was to be split between his three children from his first marriage, Pamela Davern and her two siblings.
Pamela Davern acted as the sole trustee of the fund following the death of Kevin Davern.
“It is a mystery as to how Pamela and not Matthew became the sole trustee of the fund [as] she was not the legal personal representative of the deceased trustee,” Townsends noted.
Ms Ainsworth requested that she receive a monthly benefit from the fund.
“Pamela made three monthly payments then discontinued the payments. Elizabeth was advised by Kevin’s son that the children were dissatisfied with the amounts they received from the estate and wanted $100,000 each from the estate,” Townsends explained.
“Inevitably and predictably both sides lawyered up. A number of key legal issues were quickly identified: whether the 2008 trust deed had been validly made; whether Kevin had been validly appointed as sole trustee; and whether the binding death benefit nomination was valid.”
Ms Ainsworth sought judicial advice and orders that the 2008 deed had been validly made and that Kevin had been appointed sole trustee or, alternatively, sought an order that Pamela be removed as trustee and that two independent trustees be appointed.
“Pamela [Davern] argued that there was no need for her to be replaced as trustee and appointing replacement trustees would not be in the best interests of the SMSF as they would charge fees,” said Townsends.
“The fees ground for objection to the appointment of independent trustees was quickly eliminated as the two proposed trustees, Matthew and another person, agreed not to charge trustee fees.”
Townsends said the Court considered that it would be in the best interests of the SMSF for Pamela to be replaced as trustee and for the substantive issues of whether the 2008 deed had been validly made and whether therefore the nomination was valid, to be separately considered.
“The Court decided to remove Pamela as trustee given her action to disregard her duties as trustee as she had unilaterally decided that the binding death benefit nomination was not effective. This action indicated that she would not discharge the duties as trustee in the appropriate manner. Consequently her removal as trustee was warranted,” Townsends explained.
“Pamela should either have resigned as trustee and then pursued her interests as a potential beneficiary of the death benefit, or sought judicial advice as to whether the death benefit nomination was valid or invalid.”
Potential conflicts of interest are embedded in SMSFs, Townsends said, due to the requirement that members must be trustees.
“This does not prevent trustees exercising discretionary powers which may benefit them in their capacity as a beneficiary. The spouse of a deceased member can allocate the death benefit to themselves,” the law firm said.
“However, the trustee could not unilaterally decide that a binding death benefit nomination was invalid and then disregard the nomination, as such action is tantamount to a trustee disregarding the terms of the trust deed in order to prefer her own interest as a potential beneficiary.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.