Recent Case Law Developments In Will And Trust Instrument Construction
By Charles A. Redd Sonnenschein Nath & Rosenthal, St. Louis, MO
LITIGATION IS NOW MUCH A PART OF the life of the fiduciary. The construction process of Will and trust instruments is a frequent target. In some of these cases, beneficiaries commenced legal actions to enhance or establish their beneficial interests or to enlarge their distributions. In others, fiduciaries instituted litigation seeking instructions as to the meaning of ambiguous provisions or attempting to obtain protection from liability.
The fiduciary litigation explosion is well under way. With each passing year, it seems the reported cases in the trusts and estates arena, and, in particular, the cases involving construction of Wills and trust instruments, are greater in number and more intricate in dimension. In some of these cases, beneficiaries (or those wanting to be beneficiaries) commenced legal actions to enhance or establish their beneficial interests or to enlarge their distributions. In others, fiduciaries instituted litigation seeking instructions as to the meaning of ambiguous provisions or attempting to obtain protection from liability. Among the most notable and interesting of the Will and trust construction cases decided in the last eighteen months are the following:
Amounts of Distributions
Sauter v. Bravo, 771 So.2d 1213 (Fla.App. 2000), involved a trust under which the surviving spouse (Bravo) was entitled to receive the entire net income for life. One of the decedent’s children by a prior marriage (Sauter) was the trustee. Bravo moved for summary judgment, arguing that she was entitled to receive, as income, "a minimum of three percent of the combined value of the net assets of the… estate and trust" under Sec. 738.12(1)(a), Florida Statutes, which provides:
If the total principal of the trust does not in any year yield a net income of at least 3 percent of its market value (including as income the value of any beneficial use of the property by the income beneficiary), the trustee shall pay to the income beneficiary an amount equal to the excess of 3 percent of the value of the principal, based upon the market value at the beginning of the calendar year, over the trust income paid to the income beneficiary in that year. This amount shall be paid to the income beneficiary using the first principal cash available.
Sauter took the position that the revocable trust instrument, by its language permitting the trustee to retain, hold or acquire unproductive reality or personalty and to invest and re-invest trust assets in any type of property or security regardless of whether the new asset produced any income, indicated the decedent’s intention that Sec. 738.12(1)(a), Florida Statutes, was not to apply. Although the Appellate Court recognized that appropriate language in a trust instrument could supersede Sec. 738.12, the Court rejected the trustee’s contention. The Court concluded that the language of the trust instrument authorizing the trustee to retain unproductive property did not excuse the trustee from producing income for the surviving spouse. The Court also found that the intent of the decedent, as stated in the trust instrument, was to provide income for life for his surviving spouse. Distinguishing a prior case in which the governing instrument had specifically absolved the trustee from having any obligation to produce income, the Court obviously felt that the language in the case at bar allowing the trustee to hold unproductive property was simply not the same as excusing the trustee from producing and distributing income to the income beneficiary.
In NationsBank, N.A. v. Tegethoff, 18 S.W.3d 22 (Mo. App. E.D. 2000), the decedent’s Will created two shares of a "Residuary Trust," one for each of the decedent’s children. One child was deceased and was not survived by any descendants, and so only one share of the trust remained. The child as to whom such share remained was the sole income beneficiary of that share.
The trustees were authorized to encroach upon trust principal
"for the… education, maintenance, and support of my children, or their descendants, if this becomes necessary in the opinion of the trustees, or to provide against any emergency which may arise afflicting them, or any of them, occasioned by sickness, accident, ill health, affliction, misfortune or otherwise, and they may make such encroachments from time to time and in such amounts as they may consider reasonable and necessary under the circumstances for the purposes stated."
The trustees over the years granted numerous encroachment requests by the beneficiaries; sometimes, but not always, the corporate trustee requested information from the beneficiaries to enable the corporate trustee to evaluate their need for the requested distributions. Beginning in 1991, the corporate trustee began requesting copies of beneficiaries’ income tax returns whenever they requested encroachments. In 1997, the corporate trustee filed a petition for instructions requesting the trial court to provide guidance on how much and what kind of information the trustees may or must request from the beneficiaries in determining whepther to honor encroachment requests.
Concluding that the decedent intended to make a gift of income, absolutely, but of principal only in cases of demonstrated need, the Court of Appeals directed that the private income of the beneficiaries must be considered when determining whether to make discretionary principal distributions. The Court observed that, to attribute to the testator an intention to confer an absolute gift of support, of both income and principal, the language in the Will that "they [the trustees] may make such encroachments [of principal] from time to time and in such amounts as they consider reasonable and necessary under the circumstances for the purposes stated," would have to be ignored.
Terms Defining or Designating Beneficiaries
Corr v. Corr, 2001 Okla.Civ.App. 31, involved a decedent under whose revocable trust instrument, following the death of his wife, Rachel, all remaining trust property was to be distributed to his "then living issue." A subsequent provision of the trust instrument defined "child," "children" and "issue" as follows:
The words "child" and "children" wherever used in this Agreement, shall include not only the child and children of the person or persons designated but also the legally adopted child and children of such person or persons, at the time in question. The word "issue" wherever used in this Agreement, shall include not only the child, children an issue of the person or persons designated, but also the legally adopted child and children of such person or persons and the child, children or issue thereof, at the time in question.
The trust instrument also contained a recital stating: "the Settlor has one child, THOMAS REED CORR, III;…"
The decedent indeed had one biological child, Thomas, but he also had two legally adopted children, Johnny and Gerald. Following Rachel’s death, Johnny filed a petition for declaratory judgment asking the Court to determine that he, Gerald and Thomas were the proper distributees under the trust instrument. Johnny filed an accompanying motion for summary judgment arguing that he, Gerald and Thomas were entitled to the then remaining trust property under unambiguous trust language. Thomas filed a response and a cross motion for summary judgment asserting that he was the sole remainder beneficiary under the trust instrument and that the relevant language was susceptible to two different interpretations and was therefore ambiguous. Thomas sought to have the Court consider extrinsic evidence to determine the decedent’s intent concerning ultimate distribution of the trust property.
The Court found that the trust instrument as a whole clearly and unambiguously designated Thomas, Johnny and Gerald as the remainder beneficiaries of the trust. The Court was not troubled by a combination of identification language that listed only one individual as the decedent’s child and dispositive language that directed a distribution to "issue," that included, under a clear and unambiguous definitional provision, adopted children of the decedent.
In Martin v. Palmer, 1 S.W.3d 875 (Tex.App. 1st Dist. 1999), the Court of Appeals had to determine the meaning of the seemingly innocuous phrase "my nieces and nephews." The decedent left a Will under which he bequeathed his entire estate to his wife, or if she did not survive him by 60 days, to "my nieces and nephews… The decedent’s wife did not survive him. A nephew of the decedent’s wife, designated as executor under the decedent’s Will, filed an application for probate of the Will in which he identified, as testamentary distributees, both the nieces and nephews, by blood, of the decedent as well as the nieces and nephews, by blood, of the decedent’s wife. The decedent’s blood nieces and nephews initiated a declaratory judgment action and filed a motion for summary judgment asking that the Court rule that the term "my nieces and nephews" as used in the decedent’s Will, referred only to the children of the decedent’s brothers and sisters. The respondents countered that the term "my nieces and nephews" as used in the Will, is susceptible of different meanings and that there was a genuine issue of material fact regarding the decedent’s intentions in employing the term "my nieces and nephews" in his Will.
The Court concluded that the term "my nieces and nephews", in contemporary American society, does not have a clear, definite or technical meaning and that extrinsic evidence may therefore be used to discern the decedent’s intent. The decedent’s blood nieces and nephews, maintaining that they were the only individuals referenced by the decedent when he used the phrase "my nieces and nephews," cited numerous cases decided by courts outside Texas standing for the proposition that the phrase "nieces and nephews" did not include nieces and nephews by marriage. The Court declined to follow the rationale of the cases cited by the decedent’s blood nieces and nephews and remanded the case to the trial court for further proceedings on the question of what the decedent meant by his use of the expression "my nieces and nephews" in his Will. In so doing, the Court found the following uncontroverted facts, part of the summary judgment record on appeal, to be significant
1. The decedent and his wife lived together in marriage for 50 years and had no children;
2. Both the decedent and his wife treated their nieces and nephews from both sides of the family as their own children;
3. The decedent’s niece lived with the decedent and his wife and called them "Aunt" and "Uncle";
4. The decedent referred to the decedent’s wife’s nieces and nephews by blood as "his nieces and nephews";
5. A portion of the decedent’s wife’s estate (which the decedent had received under his wife’s Will) had been inherited by the wife from her sister;
6. The decedent and his wife had "mirror image" Wills, under which each left his or her estate to "my nieces and nephews" if his or her spouse did not survive; and
7. The decedent designated one of the decedent’s wife’s blood nephews as the executor under his Will.
Under the February 1987 Will of the decedent (Kelly), in Estate of Kelly v. Stanbaugh, 311 Ill.App.3d 760, 724 N.E. 2d 1285 (Ill.App. 4th Dist. 2000), a share of the residuary estate was bequeathed to the Kelly’s nephew Galen Danner. The Will further provided that, should Galen predecease Kelly, Galen’s share would pass "to his wife, Shirley Danner, and his grandson, Shane Kimbro, …" In July of 1987, Shirley and Galen were divorced. In 1991, after Galen died, Kelly executed another Will by which she revoked her 1987 Will and which does not mention Shirley. After Kelly’s 1991 Will was admitted to probate, Shirley filed a petition contesting it. The executors countered by filing a motion to dismiss the Will contest petition arguing that Shirley and Galen’s divorce extinguished Shirley’s status as a potential distributee under the 1987 Will in any event and that Shirley, as a result, had no standing to contest the 1991 Will.
The Appellate Court construed the 1987 Will and concluded that the divorce did not extinguish Shirley’s rights under the 1987 Will and that Shirley, therefore, had standing to contest the 1991 Will. The Court explained that the language of the 1987 Will making reference to Shirley, as Galen’s wife, did not set up a condition that Shirley had to be Galen’s wife at the time of Kelly’s death in order to be a distributee of Galen’s share. Indeed, the Court noted that, since Shirley could not have taken under the 1987 Will if Galen were still then living, the use of the descriptive phrase "his wife," appearing in a dispositive provision that could take effect only if Galen were dead, could not be taken literally in any event. The Court also noted that the 1987 Will identified Shirley by name (in addition to designating her as Galen’s wife) and that the Will did not contain any language expressly making Shirley’s bequest contingent upon her and Galen’s being married at Galen’s death.
Effect of Beneficiary’s Death
National City Bank, N.E. v. Beyer, 89 Ohio St.3d 152, 729 N.E. 2d 711 (Ohio 2000) involved disposition of a portion of the remainder interest in a testamentary trust. When the survivor of two life beneficiaries of the trust died, the remaining trust property was to be divided into shares for the decedent’s three granddaughters, Sophie, Elizabeth and Katherine. The granddaughters’ shares were to be held in trust until each of them, respectively, reached age 25. At the time of the surviving life beneficiary’s death, however, all three granddaughters had reached age 25 and so, ostensibly, were each entitled to receive, outright, a one-third share of the trust property.
The trust instrument explicitly provided that, if a grandchild died before the assets of her share were fully distributed to her, the undistributed portion was to be distributed to her issue, or if none, to her sisters or their issue. Katherine died, without issue, after the survivor of the two life beneficiaries died but before having received distribution of any property composing her share of the trust. During the approximately seven years preceding her death, Katherine had been confined to a psychiatric hospital in New Jersey, and, in 1984, a New Jersey court had issued an order holding Katherine’s estate liable for the support provided to her by the State of New Jersey.
The trustee of the trust filed a petition for declaratory judgment. In their answer, Sophie and Elizabeth asked the trial court to construe the provisions of their grandfather’s Will to require distribution of the property composing Katherine’s share to them given that none of Katherine’s share had been distributed to Katherine before her death. The State of New Jersey filed an answer requesting that the Court enter an order directing distribution of Katherine’s share to her estate.
The Supreme Court of Ohio determined that Katherine had an interest that vested at the moment of death of the surviving life beneficiary that was subject to divestment upon Katherine’s death before the assets of her share had been fully distributed to her. The Court also observed that a spendthrift clause in the Will provided insight into the decedent’s intent with regard to the disposition of Katherine’s share under the circumstances presented. The Court stated that the spendthrift clause evidenced the grandfather’s intent to keep trust assets from being alienated outside the family.
In Blevins v. Moran, 12 S.W.3d 698 (Ky. App. 2000), a decedent left a Will setting out a number of pre-residuary pecuniary gifts and a specific bequest as to which no contingent distributees were named. In one provision of the Will, the decedent left $30,000 to his sister. In another provision, the decedent left all shares of his common stock in a certain company to his nephew. In yet another provision, the decedent bequeathed the sum of $15,000 each to twelve named nieces and nephews and to six named children of one of the decedent’s nephews. The residuary clause contained the following language:
All the rest, residue and remainder of my estate, both real and personal, wherever situated and of whatever nature, kind and description that I own at my death, including legacies and devises, if any, which may lapse or fail for any reason, I give, devise and bequeath to my nephews, …
The decedent died at age 97, and several named recipients of pre-residuary bequests did not survive him. A dispute then arose regarding the proper disposition of the bequests designated for the individuals who predeceased the decedent. The residuary legatees argued that those pecuniary bequests lapsed and that, under the language of the residuary clause, lapsed legacies were to pass to the residuary beneficiaries. The surviving issue of the predeceased pre-residuary beneficiaries argued that, despite the language of the residuary clause, Kentucky’s anti-lapse statute, KRS 394.400, applied and caused the pre-residuary bequests in question to pass to them.
KRS 394.400, provides as follows:
If a devisee or a legatee dies before the testator, or is dead at the making of the Will, leaving issue who survived the testator, such issue shall take the estate devised or bequeathed, as the devisee or legatee would have done if he had survived the testator, unless a different disposition thereof is made or required by the Will.
Of course, the case turned on the question of whether "a different disposition thereof [was] made or required by the Will." The residuary legatees insisted that the language of the residuary clause "including legacies and devises, …, which may lapse or fail for any reason" sets forth "a different disposition" within the meaning of KRS 394.400.
Noting that this case was one of first impression in Kentucky, the Court of Appeals summarized the holdings of a number of similar cases from other jurisdictions, and the Court conceded that several of those cases supported the position of the residuary legatees in the present case. The Court nevertheless ruled that the subject language of the residuary clause was simply too ambiguous to override what the Court found to be a very strong presumption in Kentucky against lapse. The Court observed that the Will contained no affirmative statements directing any alternative dispositions of bequests made to named individuals who predeceased the decedent.
In In re Estate of Johnson, 260 Neb. 91, 615 N.W. 2d 98 (Neb. 2000), the Supreme Court of Nebraska considered a multi-layered dispositive provision to discern the location of the residuary clause. The decedent was predeceased by his wife, his parents and his three sisters-in-law. Paragraph Fourth of the Will provided that, in the event the decedent was not survived by his wife or either of his parents, his "property and estate remaining after payment of [his] just debts and expenses" was to be divided into two equal parts. From the first part or half, the decedent gave $1,000 to St. Elizabeth Hospital, $1,000 to Havelock Methodist Church and "[a]ll of the residue and remainder" to his three sisters-in-law. The Will then provided that the second one-half of the estate was to pass to Shriners Hospital for Crippled Children. The issue was what disposition was to be made of "[a]ll of the residue and remainder" of the first part or half of the estate since the decedent’s three sisters-in-law did not survive him.
Nebraska’s anti-lapse statute was not relevant because that statute expressly operated to prevent lapse only in cases of devisees who are "related to the testator in any degree of kinship," and the three sisters-in-law were not so related. Shriners Hospital asserted, however, that Neb.Rev.Stat. Sec. 30-2344, however, was dispositive. In pertinent part, that statute provided as follows:
…, if the residue is devised to two or more persons and the share of one of the residuary devisees fails for any reason, his share passes to the other residuary devisee, or to other residuary devisees in proportion to their interests in the residue.
Shriners Hospital contended that the entire paragraph Fourth constituted the residuary clause of the Will. Shriners asserted that the residue was delineated in paragraph Fourth as "my property and estate remaining after payment of my just debts and expenses." The trial court had determined that the only residuary disposition was that portion of paragraph Fourth by which the decedent left "[a]ll of the residue and remainder of the first half of my estate" to his three sisters-in-law.
The Nebraska Supreme Court, agreeing with the trial court, concluded that the residuary clause of the decedent’s Will was not the entire paragraph Fourth but only that portion of paragraph Fourth introduced by the language "[a]ll of the residue and remainder of the first half of my estate." Thus, the Court’s construction yields the anomalous result that the residuary clause pertains to only one-half of the decedent’s estate. The Court was persuaded that the design of paragraph Fourth reflected the decedent’s intention that certain persons and entities were to receive specific portions of his estate which were not contingent on or in any way affected by the satisfaction of other bequests. The Court found that, under paragraph Fourth, Shriners Hospital was to receive exactly one-half of the estate remaining after payment of debts and expenses, no more and no less. Observing that the decedent used no language in his Will indicating that Shriners Hospital was to have any interest, under any circumstances, in the other half of the estate, the Court concluded that, since the decedent’s sisters-in-law did not survive him, the portion of the decedent’s estate that was to pass to them must instead pass to the decedent’s intestate successors.