The recent decision of Wooster v Morris is the most important decision ever regarding SMSF succession planning.
All SMSF practitioners must be aware of its facts and its vital lessons. However, we fear that the key message might be getting lost in the industry. Namely, what matters — what really matters — is the identity of who is holding the “purse strings” on death or loss of capacity.
Mr Morris (the deceased) had two adult daughters from a previous marriage (Mrs Wooster and Mrs Smoel, that is, the plaintiffs). He also had a second wife, Mrs Morris.
The deceased and Mrs Morris were the members and trustees of an SMSF. In March 2008, the deceased made a binding death benefit nomination (BDBN). The BDBN was in favour of the plaintiffs in respect of all of his interest in the SMSF. The deceased died in February 2010. His interest in the SMSF was $924,509.
Probate of the deceased’s will was granted to the plaintiffs (ie the plaintiffs were the deceased’s executors).
After the deceased’s death, the surviving trustee (ie Mrs Morris, the stepmother of the plaintiffs) was left running the SMSF. Mrs Morris had a son from a previous relationship and Mrs Morris appointed him as her co-trustee.
Later on, the trusteeship of the SMSF was changed to a company called Upper Swan Nominees Pty Ltd (Upper Swan). Mrs Morris was the sole director and shareholder of Upper Swan.
For reasons not mentioned in the judgement, the trustee decided that the BDBN was not binding. Instead, Mrs Morris, as sole director of the trustee, decided to pay none of the deceased’s death benefits to the plaintiffs but instead she decided to pay all the death benefits to herself.
The plaintiffs issued court proceedings seeking declarations that — among other things — the BDBN was valid and binding. The parties agreed that this question be answered by a “special referee”, rather than the court.
The special referee found in favour of the plaintiffs, holding that the BDBN was valid and binding and that the plaintiffs were entitled to be paid $924,509 plus interest. However, the trustee’s legal fees in defending the claim were “substantial” and had “been paid only from the accounts in the name of the deceased”. For example, the court mentioned that the draft financial accounts for 2013 record legal fees of $302,699 and accounting fees of $43,560.
The trustee and Mrs Morris (le the defendants) argued that the plaintiffs should be paid only out of the deceased’s interest in the SMSF.
Question for the Court
The court considered a number of questions. One question was what was available to be paid to the plaintiffs: was it limited to only what the deceased had in the SMSF, or could the plaintiffs also access money that Mrs Morris had in the SMSF plus her personal money?
The court held that:
- ”As a consequence of the decisions of Mrs Morris, if the defendants claimed an indemnity from the [SMSF], they would bear only a small portion of the financial consequences of the litigation, despite being entirely unsuccessful. Rather, the loss would be borne almost entirely by the plaintiffs in the depletion of their interest in the [SMSF].”
The court declared, among other things:
- All moneys held by the SMSF (including Mrs Morris’ member accounts) were available to meet the payments; and
- The trustee and Mrs Morris personally were jointly and severally liable to pay all outstanding money.
Lessons for Practitioners
Wooster v Morris contains many vital lessons that all SMSF practitioners must be aware of.
Lesson 1: legal personal representative does not automatically become a trustee
Wooster v Morris clearly dispels the myth that when a person dies, their executors (legal personal representatives) automatically become a trustee in the deceased’s place. Here, the plaintiffs were the deceased’s executors but they did not become trustees.
Rather, the identity of trustee upon death is determined by the trust deed of the SMSF. In DBA Lawyers’ opinion, there are very few deeds that appropriately distribute the power to appoint a trustee upon death or loss of capacity.
Lesson 2: BDBNs are only a partial solution at best
There is a misconception that SMSF succession planning is completely handled by making a BDBN. Wooster v Morris clearly dispels this myth as well. In Wooster v Morris, the deceased had made a valid SDBN but the plaintiffs still had to spend over three-and-a-half years in legal battles to obtain their money.
Accordingly, an adviser cannot simply tell a client to make a BDBN and expect that succession planning is handled. This leads into the most important lesson from the case.
Lesson 3: what really matters is the identity of who is holding the “purse strings”
Wooster v Morris clearly demonstrates that far more important than any BDBN is the identity of who is holding the “purse strings” upon a member’s death or loss of capacity. As stated above, this depends to a very large degree on what the trust deed of the SMSF provides. There is huge variation in this regard. Although DBA Lawyers carefully draft their deeds to ensure sensible outcomes, many practitioners find that other SMSF trust deeds have poorly drafted provisions that invariably result in the “minority” surviving member(s) wielding an unfair amount of power upon death.