IN THE MATTER OF THE MENCHHOFER FAMILY TRUST A VICKI LYNN BELTER, TRUSTEE OF THE MENCHHOFER FAMILY TRUST A, Petitioner-Appellee, vs. AMERICAN DIABETES ASSOCIATION, ALZHEIMER DISEASE RESEARCH, and PREVENT BLINDN ESS AMERICA, Respondents-Appellants.
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IN THE COURT OF APPEALS OF IOWA
No. 8-464 / 07-1702
Filed February 19, 2009
IN THE MATTER OF THE MENCHHOFER
FAMILY TRUST A
VICKI LYNN BELTER, TRUSTEE OF THE
MENCHHOFER FAMILY TRUST A,
Petitioner-Appellee,
vs.
AMERICAN DIABETES ASSOCIATION,
ALZHEIMER DISEASE RESEARCH, and
PREVENT BLINDNESS AMERICA,
Respondents-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for (North) Lee County, Michael J.
Schilling, Judge.
Appeal from the order authorizing payment of inheritance taxes from the
trust corpus and authorizing investigation of a trustor’s pre-death gifts.
AFFIRMED.
Diane Kutzko and Gary Streit of Shuttleworth & Ingersoll, P.L.C., Cedar
Rapids, for appellants.
Michael Rashid and William Cahill of Hirsch, Adams, Putnam, Cahill &
Rashid, P.L.C., Burlington, for appellee.
Considered by Sackett, C.J., and Eisenhauer and Doyle, JJ.
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SACKETT, C.J.
The respondents-appellants, three charitable residuary beneficiaries1 of
the Menchhofer Family Trust, appeal from the district court’s ruling that the Iowa
inheritance taxes owed by twenty individual trust beneficiaries be paid by the
trust, rather than by the individual beneficiaries. They contend the decision is
contrary to the intent of the trustor as expressed in the trust agreement and it
unfairly shifts the tax burden to the residuary beneficiaries, all of whom are
exempt from taxation.
They also appeal from the ruling that the costs of
investigating gifts from one trustor to certain beneficiaries be paid by the trust,
contending the trust agreement does not authorize such expenditures.
We
affirm.
I.
Background.
Clarence and Carrie Menchhofer, while residents of California, executed a
trust agreement in 1989 as part of an estate plan. They also executed wills that
would “pour over” the assets of the last to die into the trust.2 They amended the
trust in 1996 and 1999. After Clarence died in 2001, Carrie moved to Iowa. Over
a three year period before her death, Carrie made gifts and forgave loans totaling
over $541,000 to three of the twenty named beneficiaries. After Carrie, still a
resident of Iowa, died in 2005, the successor trustee began to “wind down” the
administration of the trust with a view to distributing the trust assets and
terminating the trust. The trustee petitioned the Iowa district court to invoke its
1
The fourth residuary beneficiary, a church, is not a party to this appeal.
The trust agreement provided for the creation of trust A, the survivor’s trust, and trust
B, the exemption trust, upon the death of either Clarence or Carrie. Only trust A is at
issue in this appeal. For ease of reference, we use “trust” throughout the remainder of
the decision to refer to trust A.
2
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jurisdiction over the trust, to approve certain matters concerning the affairs of the
trust, including payment of Iowa inheritance taxes from the trust, and to open an
estate for Carrie to investigate the gifts. See Iowa Code § 633A.6202 (Supp.
2005).
The three charitable organizations, which are residuary beneficiaries of
the trust answered and objected to the petition.
A hearing was held, after which the court invoked its jurisdiction over the
trust, interpreted the trust under California law, authorized the trustee to pay such
Iowa inheritance taxes from the trust as would allow the individual beneficiaries
the full federal estate tax exemption, and authorized the trustee to spend trust
income to investigate the gifts Carrie made and to pay an attorney for the estate
to be opened.
II.
Scope of Review.
The parties agree our review is de novo. Iowa R. App. P. 6.4; see also
Iowa Code § 633.33; In re Wulf, 526 N.W.2d 154, 156 (Iowa 1994).
III.
Merits.
A. Inheritance Tax. The appellants contend the district court erred in
determining that the trust provided for the Iowa inheritance tax of the twenty
individual beneficiaries to be paid from the trust. The language at issue in the
trust agreement provides:
Section 5.03. On the death of the Surviving Trustor, the Trustee
shall pay either from the income or principal of the Trust, the
expenses of the Surviving Trustor’s last illness, funeral and burial,
and any federal estate tax and state death taxes that may be due
by reason of the inclusion of any portion of the Trust Estate in the
Surviving Trustor’s estate for the purposes of any such tax, unless
the Trustee in the Trustee’s discretion determines that other
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adequate provisions have been made for the payment of expenses
and taxes.
(Emphasis supplied.)
Appellants argue the court erred in applying the California statutory
definition of “estate taxes” to defeat the “clear direction” of the trust agreement
that the trust should bear only the taxes assessed on the trust corpus itself. The
trust language provides for the trust to pay taxes “due by reason of inclusion of
any portion of the trust estate in the surviving trustor’s estate.”
The trust agreement was drafted in California, executed by California
residents, and contained a provision that “the validity of, construction of, and all
rights under the trusts provided for” be governed by California law.
Consequently, the district court found as do we that the trust should be construed
under California law.
The trust provided the individual beneficiaries would share the amount that
would not incur federal estate tax, that is, they would share the amount exempted
from federal estate tax, which, at the time of Carrie’s death was $1,500,000. The
balance of the trust was to be divided equally among the residuary beneficiaries.
The shares of the individual beneficiaries are subject to inheritance tax,
see Iowa Code §§ 450.5 (liability for tax), and the individual beneficiaries enjoy
no individual inheritance tax exemption.
See Iowa Code § 450.9.
Iowa
inheritance tax is not collected on property that passes to appellants, as they are
charitable, religious or education entities.
See Iowa Code § 450.4(2).
Iowa
inheritance tax must ultimately be paid by the beneficiary unless the provisions
and language used in the will or a trust document, considered as a whole, direct
otherwise.
To provide otherwise requires a testator’s direction by clear and
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express words or necessary implication. In re Estate of Tedford, 258 Iowa 890,
894, 140 N.W.2d 908, 911 (Iowa 1966).
A testator may, by appropriate provisions in his or her will or trust
document, shift the burden of taxation so as to relieve certain gifts at the expense
of others. See id. Courts have the task of construing such provisions according
to the intent of the testator, not only by the language and arrangement of the
provisions, but by all the attendant circumstances.
Id.
However, where the
provision is clear and there are no circumstances to suggest the intent was
otherwise than as expressed in it, the courts give it full effect. Id.; see also In re
Estate of McCullough, 243 Iowa 449, 457, 52 N.W.2d 67, 72 (1952); In re Estate
of Johnson, 220 Iowa 424, 425, 262 N.W. 811, 812 (1935).
The district court provided us with a thoroughly-researched and carefullyreasoned decision on appeal. The court determined the words “death taxes” in
section 5.03 of the trust was defined broadly enough in the California code to
include Iowa inheritance taxes.
“Death tax” means any tax levied by a state on account of the
transfer or shifting of economic benefits in property at death, or in
contemplation thereof, or intended to take effect in possession or
enjoyment at or after death, whether denominated an “inheritance
tax,” “transfer tax,” “succession tax,” “estate tax,” “death duty,”
“death dues,” or otherwise.
Cal. Rev. & Tax. Code § 13830(c) (2006).
“State” is defined as “any state,
territory, or possession of the United States, or the District of Columbia.” Id.
§ 13830(e). The court then examined the phrase from section 5.03, “that may be
due by reason of the inclusion of any portion of the Trust Estate in the Surviving
Trustor’s estate for the purposes of any such tax” to determine whether that
language was a “clear and unambiguous” expression of the trustors’ intent that
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the general rule of apportionment should not be applied.
In re Estate of
Armstrong, 17 366 P.2d 490, 494 (Cal. 1961) (requiring a “clear and
unambiguous” expression of intent not to follow the general rule of
apportionment). The court considered the testimony of attorney Burl Waits, who
drafted the trust agreement for the Menchhofers, that Clarence and Carrie did not
want any of their money to go to taxes, that they wanted it to go to the heirs and
charities. The court concluded the language of the trust agreement was not
ambiguous.
Considering the trust document as a whole, the Court concludes
that the plain meaning of Section 5.03 is that “any state death tax,”
including the Iowa inheritance tax, should be paid from trust income
or principal because the tax “became due by reason of the inclusion
of a portion of the trust estate passing to Carrie’s estate.” This
Court FINDS Section 5.03 is a direct, unequivocal statement by the
Trustors that the general rule for apportionment of Iowa inheritance
taxes does not apply to Trust A under the circumstances found in
this case. Section 5.03 is written to require these taxes to be paid
by the trust.
The court noted it would have arrived at the same conclusion even if it had
determined the language was ambiguous.
De novo interpretation of written instruments, including trusts, “presents a
question of law unless interpretation turns on the competence or credibility of
extrinsic evidence or a conflict therein.” Ike v. Doolittle, 70 Cal.Rptr.2d 887, 900
(Cal. Ct. App. 1998).
“[T]he intent of the trustor prevails and it must be
ascertained from the whole of the trust instrument, not just separate parts of it.”
Id. at 900-01.
In interpreting a document such as a trust, it is proper for . . . the
appellate court on de novo review to consider the circumstances
under which the document was made so that the court may be
placed in the position of the testator or trustor whose language it is
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interpreting, in order to determine whether the terms of the
document are clear and definite, or ambiguous in some respect.
Id. at 901 (citation omitted).
We agree with the district court that the terms at issue in the trust
agreement are unambiguous.
From our review of the applicable case and
statutory law from California, we come to the same conclusion as the district
court, that the term “death tax” in the trust agreement includes Iowa state
inheritance taxes. The statutory definition specifically includes taxes “on account
of the transfer or shifting of economic benefits in property at death.” Cal. Rev. &
Tax. Code § 13830(c). The trustors specified that the trust was to pay any death
tax. The district court correctly determined the Iowa inheritance taxes due should
be paid from the trust income or principal. Because the trust agreement provided
in section 4.01 that the Trust A portion of the trust estate is the survivor’s trust, it
is included in Carrie’s estate because she was the second to die. We agree with
the district court that the language of section 5.03 encompasses Iowa’s
inheritance tax and that it provides for the trust to pay such taxes. We therefore
affirm on this issue.
B. Gifts. The charitable residuary beneficiaries contend the district court
erred in determining the trust should pay the costs and fees associated with
investigating the circumstances under which Carrie made gifts and forgave loans
in the last few years before her death. They contend the record is devoid of any
evidence Carrie lacked capacity to make the gifts and the individual beneficiaries
would be disproportionately benefitted if the gifts were brought into the trust. The
trustee contends the gifts should be investigated because they were sizeable,
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they benefitted only three of the individual beneficiaries to the detriment of the
others, and they appear to frustrate the intent the Menchhofers’ estate plan.
The district court considered both whether the trust agreement allows
payment of such investigative costs and fees from the trust corpus and whether
there was any basis for investigating the gifts, and said:
The Court believes that the intent of the Trustors will be
facilitated by an investigation of Carrie’s gifts. The trust scheme
envisioned equal shares being passed to named beneficiaries. The
gifts appear inconsistent with this scheme. Although the record is
unclear about the circumstances of any one gift, there is evidence
that Carrie was blind before she died. Her medical condition raises
the specter that there may have been some undue influence or
fraud by third parties. The large amount of the gifts is another
major factor that justifies investigation. Finally, the Trustee is dutybound to administer the trust with fairness and loyalty to all
beneficiaries. The Trustee could properly determine in this case
that the 18 beneficiaries who did not receive gifts, as well as the
charitable beneficiaries, deserve an investigation to satisfy the
questions which quite naturally arise under these circumstances.
The district court did an extensive analysis of the language of the trust and
California law before concluding the trust could hire a specified law firm and
spend no more than $4000 to investigate the circumstances of the gifts. We
agree with the district court’s careful analysis on this issue and believe, as did the
district court, that such fees can be paid from the trust.
The next question is whether there is an unfairness to the charities in
providing for payments under these facts.
In In re Estate of Law, 253 Iowa 599, 603, 113 N.W.2d 233, 235 (1962),
the Iowa court addressed the issue of a nominated executor obligating a
decedent’s estate for attorney fees in an action challenging decedent’s will and
indicated that in instances where no special interest of the estate appears,
expense to the estate may not be justified, and at times to allow fees as estate
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costs would compel the contestant to share in the cost of attorney fees of the
party determined to be wrong.
There can be no definite rules as to when an executor or administrator can
legally obligate an estate to pay expenses and attorney fees connected with
litigation. Id. at 602, 113 N.W.2d at 234. The circumstances of each case must
be assessed to determine if the fees are reasonably required or justified in the
interest of the estate.
For an attorney to be paid fees by a fiduciary, it is
generally necessary to show a benefit to the estate and just cause for pursuing
the matter. See generally In re Estate of Cory, 184 N.W.2d 693, 698-99 (Iowa
1971).
There is inequity in allowing an executor or trustee to justify the depletion
of an estate by attorney fees to support the interests of heirs as against a
claimant or claimants. See In re Estate of Roggentien, 445 N.W.2d 388, 390
(Iowa Ct. App. 1989). In Roggentien, we determined there are no hard and fast
rules, and we look instead to the balancing of equities. Id. We considered (1)
the nature of the proceeding, (2) the course of action needed to be taken, (3) the
fact because of the size of the estate the ultimate issue was between claimant
and heirs, and (4) whether the heirs should have been forced to conduct litigation
at their own expense. Id.
This is a substantial trust. We cannot say the charities would not benefit if
money is returned to the trust. We believe a limited investigation is justified and
not inequitable to the charities. We affirm on this issue.
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IV.
Summary.
We affirm the district court’s determination the language of the trust clearly
expresses the trustors’ intention that the inheritance taxes on the trust assets
passing to the individual beneficiaries be paid from the trust corpus to allow the
maximum amount to pass to those beneficiaries. We affirm the district court’s
order authorizing the trustee to pay to investigate gifts made by Carrie before her
death.
AFFIRMED.
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