A defining case for SMSF structure

DBA Lawyers director Daniel Butler revisits a watershed court case and the learnings it provided the SMSF sector.

The prudence of employing a corporate trustee rather than individual trustees was noted shortly after the Katz v Grossman decision was handed down in late 2005. It remains relevant today and is a great war story for advisers.

Indeed, there have been a great number of cases that have since added to our understanding in death benefit disputes, including Wooster v Morris [2013] VSC 594 and Wareham v Marsella [2020] VSCA 92.

But in this article we revisit the Katz v Grossman case to reinforce some key points.

Facts

This case involved a dispute between a brother, Daniel Katz, and a sister, Linda Grossman, over who technically were the trustees and members of their deceased parents’ SMSF and therefore who had control over their dead father’s $1 million-plus benefits.

The father, Ervin Katz, and the mother, Evelin Katz, were the trustees and members of the fund. After his wife’s death, Ervin appointed Linda as the other trustee of the SMSF on 18 March 1999, relying on the powers conferred upon him by the Trustee Act 1925 (NSW). Section 6(4) of this piece of legislation provides:

The appointment may be made by the following persons, namely:

a. by the person or persons nominated for the purpose of appointing new trustees by the instrument, if any, creating the trust, or

b. if there is no such person, or no such person able and willing to act, then by the surviving or continuing trustees or trustee for the time being, or by the legal representative of the last surviving or continuing trustee.

The equivalent Victorian provision is section 41(1) of the Trustee Act 1958 (Vic).

On 30 August 2003, Linda completed an application form for admission as a member of the fund, which was also signed by her as trustee.

On 19 September 2003, Ervin died. Probate was not obtained until 5 August 2004 (probate was granted to his son and his daughter, that is, the plaintiff and the defendant).

Shortly after Ervin’s death, Linda appointed her husband, Peter Grossman, as trustee of the SMSF on 5 December 2003. Subsequently, Linda refused to follow her late father’s non-binding nomination that expressed his wishes to have an equal sharing of his superannuation benefits between her and her brother, Daniel.

The decision

Was Linda a trustee?

The court held Linda had been validly appointed as a trustee.

Daniel had argued Linda had not been validly appointed in 1999 as Ervin did not have the authority to do so because:

• Ervin and the estate of Evelin (that is, the majority of members – the court accepted that under the current deed, membership does not cease upon death) should have appointed the new trustee under the deed, and

• there was no power for the continuing trustee, Ervin, to appoint under section 6(4)(b) of the NSW Trustee Act because that provision only comes into force where the people mentioned by the trust instrument, that is ,the majority of members, did not exist.

The court rejected Daniel’s arguments because since it took so long for Evelin’s probate to be obtained, it can be said “there is no person having the power ... who is able and willing [sic] to act”. Therefore, section 6(4)(b) of the NSW Trustee Act applied and the continuing trustee, that is, Ervin, did have the power to appoint Linda.

Is Linda a member?

The court held Linda was not a member because she failed to comply with the deed. The deed stipulates the trustees determine membership: Linda’s application had only been signed by one of the two trustees and there was no evidence of her father’s consent. Moreover, there was no evidence of the trustees delegating to Linda the power to admit a member.

It is interesting to note the original 1965 deed stated membership ceased on death. However, the 1995 deed referred to a ‘deceased member’ and the court therefore decided the deceased member’s estate remained a member until the death benefit had been paid.

Is Linda’s husband a trustee?

The court held Linda’s husband was validly appointed as co-trustee of the SMSF. This was because, upon Ervin’s death, his estate was the sole member of the SMSF. However, because Daniel and Linda were also the executors of Ervin’s estate, it was “doubtful” whether they would have agreed upon an appointment. Accordingly, for the purposes of section 6(4)(a) of the NSW Trustee Act , the person to whom the instrument gave power to appoint, that is, the executors of Ervin’s estate, were not ready and willing. Therefore, section 6(4)(b) came into force a second time. As a result it was determined the surviving trustee, Linda, had the power to appoint a co-trustee, which she did when she appointed her husband to this role.

Conclusions

This case highlights:

1. The importance of following correct legal procedure. When disputes arise, usually upon death, divorce or ATO audit, aggrieved parties are always quick to find flaws in prior documents. Documents prepared by many suppliers, such as those online especially where the prior document trail is not reviewed, may not stand up to close scrutiny.

2. The person who prepares the documentation must have an in-depth knowledge of all the relevant laws. Superannuation law, general trust law and succession law were all vital to this case. The ability to appoint the co-trustee, on two separate occasions, relied on the NSW Trustee Act and not the express provisions of the fund’s trust deed.

3. The succession to the trustee of an SMSF is vital. If the two children had been appointed members of the fund, they would have become the successor trustees. Allowing one child to be a co-trustee in this case provided control over the deceased father’s death benefit.

4. The importance of a binding death benefit nomination. If Ervin had implemented a binding death benefit nomination, this whole case could have been avoided. This is because the case arose from Linda refusing to give effect to Ervin’s non-binding request that his death benefit be shared equally between Linda and Daniel.

This was a costly case that could have easily been avoided. A brother and sister will probably never speak again. Further, most of the legal costs of both sides were paid by the SMSF.

We therefore recommend SMSF documentation, including deeds, change of trustee, admission of member, binding death benefit nominations and pension documentation, be prepared by lawyers with relevant practical and technical skills. In our opinion, quality documents provide much greater value over the longer term and end up costing less.