In late 2013, the WA Supreme Court handed down the decision of Ioppolo v Conti  WASC 389, which was subsequently appealed with the outcome of the appeal handed down this week.
The original case involved Francesca Conti and Augusto Conti, who were married and both trustees and members of an SMSF. Francesca had children who were not Augusto's biological children.
The SMSF’s trust deed stated that unless there was a binding death benefit nomination, death benefits were to be paid at the trustee’s absolute discretion, said DBA Lawyers director Bryce Figot, explaining that this is a “very common provision”.
Francesca did not leave a valid binding death benefit nomination before she died. In her will, however, she stated that her entitlements in the SMSF were to be paid to her children and specifically stated that no SMSF death benefit be paid to Augusto.
With Augusto left as the sole trustee, he decided to pay all of Francesca’s benefits to himself and to the children, Mr Figot said.
“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 — of which he was the sole director and shareholder,” Mr Figot added.
Two of Francesca’s children were executors of Francesca’s estate, and they brought an action on several grounds.
“The distribution of the death benefits was at the heart of the dispute,” Mr Figot said.
In the 2013 decision, the plaintiffs, who were Francesca’s children and executors, argued that Francesca’s legal personal representative must be appointed as trustee of the fund because the fund was required to remain an SMSF.
This argument failed in the 2013 decision and the plaintiffs lost again on appeal.
“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,” Mr Figot said.
“Naturally, whoever is left holding the ‘purse strings’ has tremendous power. 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."
The plaintiffs also argued in the 2013 decision that because Francesca’s will directed all benefits to be paid to her children, Augusto had not acted in good faith in paying himself. They lost both the 2013 decision and the appeal.
“Historically, it has been difficult to make a successful ‘bad faith’ argument and this case was no exception,” Mr Figot said.
“Whenever a trustee has an absolute discretion, this is never an absolute discretion in the sense that most people understand the term,” he added.