February 07, 2020

Recent Indiana Court of Appeals Decision Illustrates Importance of Clear Estate Planning Documents

Background

Recently, the Indiana Court of Appeals decided the case of Murphy, et al. v. Trustee of Star Financial Bank, et al. The case involved a woman named Janice who had executed a revocable living trust in 1990. Upon Janice’s death, the trust provided a lifetime income interest for Janice’s sister-in-law, Jacqueline, during Jacqueline’s life, and then the remainder was to be distributed to Janice’s brother, Ralph, and sister, Alma, after Jacqueline passed away. The trust’s remainder Distribution Provision read as follows:

At the death of Jacqueline, the remaining assets are to be converted to cash and distributed in equal shares, share and share alike, to [Janice’s brother Ralph], and [Janice’s sister Alma], and if either of said [Ralph] and [Alma] is not then living, to their surviving children, per stirpes.

A few years after creating her trust, Janice’s attorney prepared different estate planning documents. These documents, among other things, eliminated the life estate for Jacqueline and provided that at Janice’s death all assets were to be distributed “in equal shares, share and share alike, to my brother [Ralph], and my sister [Alma]. If either of them should predecease me, then their interest goes to their surviving children, per stirpes.” Janice’s attorney explained in a letter that accompanied the documents that Janice intended that, upon her death, “all of the remaining assets in [Janice’s] estate go to Ralph and Alma in equal shares. If either of them predecease [Janice], [Janice] wanted their share to go to their children.”

Janice did not execute these estate planning documents, so when she passed away in 1997, Janice’s sister-in-law Jacqueline received a life estate in the trust income, in accordance with Janice’s 1990 revocable living trust.

By the time Jacqueline passed away in June 2018, both Ralph and Alma were deceased. Ralph had five children, three of whom were still living. Ralph was also survived by three grandchildren who were descendants of the two children who predeceased Jacqueline. Alma had five children, all of whom predeceased Jacqueline. Alma’s 13 grandchildren survived Jacqueline.

1st Gen. Ralph Alma
2nd Gen. A B C D E F G H I J K
3rd Gen. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

The trustee, a financial institution, docketed the trust to determine heirship. Ralph’s three children and Alma’s 13 grandchildren separately intervened in the proceedings. Ralph’s three children argued they were entitled to all the trust assets because the trust’s Distribution Provision contained the phrase “surviving children.” They argued there were two conditions to receive a distribution:

  1. The qualified recipient must be a child of Ralph or Alma.
  2. The recipient must be alive on the date of Jacqueline’s passing.

In their view, because they were the only living children of Ralph or Alma, they were entitled to all the assets in a per capita distribution at the second-generation level.

Alma’s grandchildren also intervened and argued that Ralph’s children on the one hand and Alma’s grandchildren on the other should each receive one-half of the trust’s assets. In their view, the Distribution Provision as a whole suggested that Janice intended to provide equal gifts to each family due to the use of the term “equal shares” and a “per stirpes” distribution at the second-generation level.

Both sides filed motions for summary judgment, and the trial court sided with Alma’s grandchildren. In particular, the court held that the language of the trust instrument was ambiguous in its use of conflicting terms. “Surviving” usually connotes a conditional gift requiring the beneficiary to be alive on the date of distribution. In contrast, “per stirpes” indicates a distribution among branches of a family tree that allows descendants of a predeceased beneficiary to take the beneficiary’s interest. Because the trust used both terms, it was ambiguous and extrinsic evidence was permissible to ascertain Janice’s intent.

Based on the trust instrument and the evidence, including the unexecuted estate planning documents, the trial court found there was no genuine issue of material fact that Janice intended to create equal, unconditional, vested gifts of the remainder of the trust assets to the families of her two siblings, Ralph and Alma. The trial court granted summary judgment in Alma’s grandchildren’s favor and Ralph’s children appealed.

Indiana Court of Appeals’ Analysis

In its analysis, the Indiana Court of Appeals first assessed whether Janice’s trust instrument was ambiguous. The Court of Appeals determined that the trust was unambiguous as to one of the two classes of beneficiaries it created. Alma and Ralph formed the first class of beneficiaries, and distribution to them at the first-generation level was to be per capita in accordance with the trust’s language “in equal shares, share and share alike.”

The second class of beneficiaries consisted of Alma’s and Ralph’s children, and the Court of Appeals found that the trust instrument was ambiguous as to the distribution to this class. In particular, the Court of Appeals agreed with the trial court that the Distribution Provision’s use of the terms “surviving” and “per stirpes” is irreconcilable and creates ambiguity.

The Court of Appeals then considered the extrinsic evidence to resolve the ambiguity and determined that Janice intended that the second class of beneficiaries receive per stirpes distributions. The Court of Appeals found that Janice knew that Ralph and Alma did not have the same number of children yet wanted their families to have equal gifts, as reflected by the subsequent unexecuted estate planning documents. Accordingly, only a per stirpes distribution would effectuate that intent. In addition, the Court of Appeals noted that the law favors early vesting of interests, which militates against reading the term “surviving” to create a contingent interest in the children.

Thus, the Court of Appeals affirmed the trial court’s grant of summary judgment in Alma’s grandchildren’s favor.

Going Forward

This unanimous published opinion demonstrates the importance of drafting estate planning documents that clearly express the testator’s intent. Questions on estate planning or litigation should be directed to legal counsel.

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