Important lessons from SMSF succession planning case: Ioppolo v Conti

The decision of Ioppolo v Conti [2013] WASC 389 contains many important implications for SMSF advisers. This article discusses some of the ‘must know’ points.

(This case is sometimes referred to as Ioppolo & Hesford v Conti depending on which method of legal citation is being used.)

Facts

Francesca was married to Augusto and they were both the trustees and members of an SMSF. Francesca had a number of children. The children had different surnames to Augusto, suggesting that Augusto was Francesca’s second husband and that the children were from a previous relationship (ie, Augusto was the children’s step father).

The SMSF’s trust deed provided that unless there was a binding death benefit nomination, death benefits were to be paid at the trustee’s absolute discretion. Naturally, this is a very common provision to see in SMSF deeds.

Francesca died. She did not leave a binding death benefit nomination. However, she did express in her will that her entitlements in the SMSF were to be paid to her children and specifically stated that no SMSF death benefit be paid to her husband (ie, Augusto).

Upon death, Augusto was left as the sole trustee of the SMSF and it appears that he had all the power to appoint a new trustee.

Accordingly, it seems that he arranged for a company called ‘Augusto Investments Pty Ltd’ to be appointed as the trustee of the SMSF — which he was coincidentally the sole director and shareholder of.

Shortly thereafter Augusto Investments Pty Ltd decided to pay Francesca’s death benefits to Augusto and none to her children. This distribution was at the heart of the dispute.

Two of Francesca’s children were executors of Francesca’s estate. They brought an action on several grounds. Each of the grounds (and the outcome) illustrates an important lesson.

The executors of Francesca’s will did not automatically become trustees in Francesca’s place

There is a common misconception that a trustee’s legal personal representative automatically steps into the role of trustee of the SMSF. This is typically wrong. Rather the answer will depend on whatever the SMSF’s trust deed says.

In Ioppolo v Conti the plaintiffs argued that the deed required Francesca’s legal personal representative to be appointed as trustee of the SMSF because the deed stated that the fund must remain an SMSF. This argument failed.

Naturally, whoever is left holding the ‘purse strings’ has tremendous power. Again, who this is depends on what the deed says and there is huge variability in this regard. Accordingly, advisers should carefully check the SMSF’s deed to determine who will be the trustee upon death.

Trustees must exercise discretion in faith good

Whenever a trustee has an absolute discretion, this is never an absolute discretion in the sense that most people understand the term.

Rather all discretions must be exercised:

• in good faith (this duty can never be modified — Armitage v Nurse [1998] Ch 241);
• upon real and genuine consideration; and
• in accordance with the purposes for which the discretion was conferred.

The plaintiffs argued that because their mother’s will directed all benefits to be paid to her children, Augusto had not acted in good faith in paying himself.

Historically, it has been difficult to make a successful ‘bad faith’ argument and this case was no exception. The plaintiffs lost.

Notwithstanding, advisers should remember that all trustee discretions should be made upon real and genuine consideration and in accordance with the purposes for which the discretion was conferred.

Will does not cover super

It is somewhat ‘old hat’ to state it, but a will does not cover super. This case illustrates this well. As Master Sanderson wrote in the judgment:

It was common ground between the parties the trustees of the fund are entitled but not bound to take into account the desires of a deceased member expressed in a will as to the distribution or application of that member’s superannuation account.

Want to know more?

SMSF Strategy Seminars

The upcoming SMSF Strategy Seminars will cover the latest in SMSF succession planning, including the full implications of Ioppolo v Conti, and much more. For more information, or to register, visit www.dbanetwork.com.au

The Complete Guide to SMSFs and Planning for Loss of Capacity and Death

DBA Lawyers offer a publication called The Complete Guide to SMSFs and Planning for Loss of Capacity and Death. It has recently been updated with relevant case law, taxation and all other developments. For more information, or to purchase, visit http://www.dbalawyers.com.au/complete-guide/

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This article is for general information only and should not be relied upon without first seeking advice from an appropriately qualified professional.