Opinion
C.M. No. 10962-NC.
Date Submitted: March 25, 2004.
July 6, 2004.
Charles Gruver, III, Esquire Charles Gruver III, P.A. Hockessin, DE.
David J. Ferry, Jr., Esquire Ferry, Joseph Pearce, P.A. Wilmington, DE.
Dear Counsel:
This case is the offspring of the marriage of two difficult probate problems: (1) the children of the first marriage and the spouse of the second marriage who mutually dislike each other; and (2) a horribly drafted will that fails to designate beneficiaries for a testamentary trust into which virtually all of the decedent's assets flow. The parties debate whether certain cash bequests are to be paid now, following the testator's death, or later, following the death of his widow, the intended beneficiary of the trust. This is the Court's decision after trial.
* * *
Robert J. Shank (the "Decedent") died on May 12, 2002. He was survived by his widow, Petitioner Dorothy E. Shank ("Mrs. Shank"), and three daughters, Respondents Cheryl L. Kemp ("Ms. Kemp"), Robin M. Shank, and Cynthia Ohrt (collectively, the "Respondents"). The Decedent had a will (the "Will"), dated March 13, 1997, drafted by Douglas R. MacGray, Esquire ("MacGray"), a Delaware attorney. MacGray, at the same time, also prepared a will for Mrs. Shank.
Also named as respondents in the Petition for Instructions are Mrs. Shank's children, Judy Webb, Phyllis Stone, Juanita Zill, and Fredia Missimer (the "Stepchildren"); they have not participated in this litigation, but concur in the positions taken by their mother.
PX 2.
MacGray acknowledges that the Will contains many errors, some of which resulted from "cutting and pasting" portions of Mrs. Shank's will into drafts of the Will. For example, at one point the Will refers to "the seven children of my husband and me." Unfortunately, not all of MacGray's errors are simply the product of shoddy editing; some raise perplexing substantive issues.
Tr. at 42-43. MacGray drafted Mrs. Shank's will first and then turned to preparing the Will. Because MacGray understood Mrs. Shank to have a substantially less valuable estate than her husband, the will which he prepared for her was considerably less complex.
The Will starts out innocuously enough. Mrs. Shank is appointed the Executrix. Mrs. Shank is then given the Decedent's tangible personal property. The Will next addresses the Decedent's "residuary estate." The sum of $10,000 is given to St. Andrews School in Middletown, Delaware. That bequest is followed by the first of the substantive drafting failures.
Actually, she is appointed the "Executor," but, in light of the Will's other shortcomings, the Court will not dwell on this aspect.
The Will, in Section III(B)(1)-(2), provides:
B. I give all of the rest, residue and remainder of my estate, not previously disposed of, both real and personal, wherever situate, but not including any rights, interests or property over which I have a power of appointment at the time of my death ("my residuary estate"), to my friend Jacqueline Cross, my friend David Davidson, and my attorney Douglas R. MacGray or their successors ("Trustees"), in trust, for the purposes set forth herein.
1. Trust Fund. Trustees shall hold my residuary estate, together with any funds received by Trustees from other sources, as the trust fund, and shall dispose of the income and principal as hereafter provided. Prior to any division of the trust fund as provided in the following paragraph, Trustees shall distribute the net income to my wife, if she is then living.
2. Division of the Trust Fund. If my wife, Dorothy E. Shank, survives me, Trustees shall set aside, as the "Marital Trust", the smallest fraction of the trust fund which would reduce the transfer tax liability of my estate (without regard to any generation-skipping taxes imposed on any "direct skip", as defined in Chapter 13 of the Code) to the lowest possible amount after taking into account all credits and deductions against such taxes available to my estate. Trustees shall only allocate to the Marital Trust those assets which will qualify for the marital deduction for federal estate tax purposes. To the extent there is sufficient other property, Trustees shall not allocate to the Marital Trust any asset that would constitute income in respect of a decedent for federal income tax purposes, or any asset which would produce a credit for foreign death tax purposes in my estate. Trustees shall allocate to the Marital Trust all United States Treasury Bonds which are not redeemable at par in payment of federal estate taxes in my estate but which may be redeemable in my said wife's estate. The remaining fraction of my residuary estate not set aside as the Marital Trust, or the entire trust fund if my said wife predecesses [sic] me, shall be set aside as the "Residuary Trust".
The Will, thus, establishes two trusts: a marital trust and a residuary trust. When the Will was executed, it was common practice to create two trusts to accommodate two aspects of tax planning for estates: (1) property could pass to the surviving spouse free of inheritance tax; and (2) a federal tax credit allowed a decedent to transfer property up to certain value without net tax liability.
In 1997, the credit allowed $600,000 to pass without federal tax.
In order to fund the marital trust and the residuary trust (which might also be called a bypass trust or a credit shelter trust), the Will established a formula that, in effect, would lead to placing in the residuary trust an amount sufficient to take full advantage of the tax credit with the balance of the estate passing to the marital trust. However, due to the worth of Decedent's estate, there were not sufficient assets to exhaust the credit. Thus, all of his residuary estate, other than the bequest to St. Andrews, went, under the terms of the Will, to the residuary trust; none went to the marital trust.
MacGray explained the tax advantages as follows:
A. [By MacGray] . . . But one of the things after going through his property that I wanted to make sure I talked with him about was the estate tax. So, I talked with him about the $600,000 at that time exempt equivalent, and we talked a little bit about how you can avoid paying estate taxes, or at least some level of them, with what's called a credit shelter trust or an AB trust.
Q. [By Mr. Gruver] In essence, what is that? What is the concept of a credit shelter trust?
A. Essentially you carve out, if necessary, a portion of your estate when you die and set that aside for the benefit of your spouse. The IRS has very liberal language you're allowed to use so that the spouse — this is what I tell them all the time — the spouse has complete access to it, if you want, can even spend it all if they want. But if there's anything left in that trust at the time of the surviving spouse's death, the first spouse's exemption will apply to it. So, you can use both exemptions.
Q. If I understand what you're saying is, you carve out — the concept, if you do the proper terminology in your wills, you have a residuary trust, which is the first monies which are equivalent to the federal exemption at that point in time when you die. Anything that remains goes in the martial trust; correct?
A. Correct.
Q. What is the benefit — what is the intent to the benefit of the spouse?
A. The intent is that it's — again, this is something that I say over and over again —
Q. The surviving spouse?
A. — to people is that — because often the concern is, well, I just really want to leave everything to my spouse. So, the way I explain it is that the credit shelter trust is really just a way to avoid estate taxes. It still belongs to the spouse. The spouse can still be the trustee, if you want, and the rest of the property over and above there are no restrictions on because we don't need any restrictions.
Tr. at 34-36.
The Will, at Section III(B)(4), has directions for disposition of the income and principal of the marital trust:
4. Marital Trust. Trustees shall distribute the net income of the Marital Trust to my said wife at least annually for life. In addition, Trustee may, from time to time, distribute any portion, or all, of the principal to my said wife, if Trustees deem such a distribution to be in her best interests, without regard to any other sources of funds which might be available to her.
. . . .
On the death of my said wife, Trustees shall distribute the balance of the principal as follows:
a. My executor shall distribute fifty thousand dollars ($50,000) to each of my children and each of the children of my wife, Dorothy E. Shank who are living at the time of my death. No child of mine or child of my wife shall be entitled to enforce this provision of this my will prior to eighteen months subsequent to the date of my death.
b. The remaining portion of my estate shall be given to Juanita Jane Zill ("Trustee"), in trust, to be split seven ways for the seven children of my husband Robert J. Shank and me (the "Children"). Trustee shall distribute these funds as follows:
i. For those children of ours who, at the time of my death, have no issue, Trustee shall give one seventh of the remaining portion of my residuary estate outright and free from trust.
ii. For those children of ours who, at the time of my death, have issue, Trustee shall take the portion for that child and distribute it to his/her issue. . . .
The parties agree that the reference to "my husband, Robert J. Shank" is a reformable typographical error; it should read "my wife, Dorothy E. Shank."
The marital trust directs the trustees to pay the trust's net income to Mrs. Shank for her life and authorizes a distribution of principal to her whenever the trustees "deem such a distribution to be in her best interests." In contrast, the typical bypass or credit shelter trust provides for payment of income to the beneficiary at least annually but, necessarily, because of federal law, imposes a more restrictive standard on invasions of corpus. For this type of trust, principal may be paid under a "health, education, support and maintenance" standard or up to an amount which is the greater of $5,000 or 5% of the trust principal. See, e.g., 1 FREDERICK K. HOOPS, FAMILY ESTATE PLANNING GUIDE § 5:4 (4th ed. 2001); I.R.C. § 2041.
The Will, however, has no instructions for disposition of the principal and income of the residuary trust.
* * *
How to handle the assets in the residuary trust, which holds virtually all of the estate's assets but has no dispositive directions, is the question posed by this litigation. Mrs. Shank contends that the assets in the residuary trust should be held for her lifetime benefit. The Respondents contend that the Will should be construed to implement the Decedent's intent that they each be given currently a gift of $50,000. Before turning to this question, however, some additional background is necessary.
The Respondents also contended in their opening statement at trial that the shortcomings of the Will created a partial intestacy.
It is our position that because there is no effective residuary trust, no residuary clause, that the remaining assets pass [under] the intestate law under Section 12 Del. C. § 501 of Title 12. The intestate distribution would be a life interest in real estate: the spouse, remainder to his three children, my clients, and the personal estate would be 50 percent to the spouse and 50 percent to the children.
If there were an ambiguity that might be a different story. Again, there's no ambiguity. There's a complete omission of a residuary clause in this will.
Tr. at 15.
In their Answering Post-Trial Memorandum, at 1 n. 1, they state, "the Respondents will not argue at this time that Decedent died intestate." This time, however, is the only time for making that argument; the Respondents' partial intestacy argument is treated as abandoned.
* * *
The marriage between the Decedent and Mrs. Shank lasted approximately 24 years. It was not the first marriage for either. The Respondents are the Decedent's three children from his prior marriage. The Stepchildren are Mrs. Shank's surviving children from her earlier marriage. The relationship between Mrs. Shank and the Respondents was not a good one. The Stepchildren grew up in the home of the Decedent and Mrs. Shank. The Respondents, on the other hand, were raised primarily by their mother. Although some of the Respondents may have been estranged from the Decedent at one time, they had reconciled before his death.
In the spring of 1996, the Decedent and Mrs. Shank discussed the need for updated wills and conferred with MacGray; they met again with him in December and eventually executed wills the following March. According to Mrs. Shank, the Decedent wanted his assets to be placed in trust for her benefit. A trust was necessary because his business would be an important asset and Mrs. Shank was not familiar enough with the business to manage it. Thus, the trustees could help her with operating the business. On her death, his children and her children would each receive $50,000.
Tr. at 88-89.
The testimony over the timing of the bequests to the children, however, was not consistent. David Edward Davidson, who at one time was to be one of the trustees but was relieved of that duty by the Decedent, testified that the Decedent told him that the Decedent's daughters would received $50,000 following his death. Mr. Davidson, however, had no recollection regarding gifts to the Stepchildren. Furthermore, his memory as to when he discussed this matter with the Decedent (other than on a vacation) was imprecise. Mr. Davidson, who had been a close friend of the Decedent, was of the view that his estate would be worth more than one million dollars.
Tr. at 111-13.
Tr. at 122.
Jacqueline E. Cross, who had worked for the Decedent in his business for more than two decades and who was appointed trustee by the Decedent, recalled that the Decedent had told her that his daughters would receive $50,000 each on his death. She was not sure when he told her that; however, she thought it was shortly after his fiftieth birthday. The Decedent was 62 when he died in 2002; thus, the conversation may have been several years before the Will was written.
Tr. at 126-27.
Cheryl Kemp, one of the Respondents, testified that her father, who was not one to talk about financial matters, told her that each of his daughters would receive $50,000 on his death.
Tr. at 133.
MacGray, who met at least twice with the Decedent before completing the Will, was clear that the Decedent intended the $50,000 gifts to the Decedent's children (the Respondents) and Mrs. Shank's children (the Stepchildren) to be paid after Mrs. Shank's death. His recall as to the timing of those gifts is consistent with the dispositional plan that he developed after his discussions with the Decedent. He understood the Decedent's principal concern to be his wife. MacGray recommended the two trusts as a means of leaving everything for the benefit of Mrs. Shank but with the opportunity to take full advantage of the tax credit in both estates. The trustees, even with the different standards for authorization of distributions to the surviving spouse from each trust, would have been able to address Mrs. Shank's needs with funds from both trusts.
Tr. at 27.
Tr. at 34-36. Mrs. Shank's estate would have been worth considerably less than the Decedent's and would not likely have used up all of the credit. Property in the marital trust would benefit on its passing to the next generations from the balance of the credit attributable to her estate. Because of the limited value of Mrs. Shank's separate estate, her will gave all of her estate to the Decedent. MacGray viewed the couple's dispositive scheme as one which, although employing different vehicles, allowed each to give the property to the other.
I find MacGray's testimony to be the most credible of the witnesses who recounted their understanding of the Decedent's intentions. Both Mrs. Shank and Ms. Kemp are interested and both testified in ways that are inconsistent with clearly drafted provisions of the Will. Ms. Kemp referred to the bequests to be paid to the daughters (the Respondents) but made no mention of gifts to the Stepchildren. Regardless of when the $50,000 bequests are to be paid, the Respondents and the Stepchildren are entitled to payment at the same time. Mrs. Shank testified that the gift to St. Andrews School was to be paid following her death, but the Will unambiguously provides for payment of that gift following Decedent's death. With respect to Mr. Davidson's testimony and Ms. Cross' testimony, neither (understandably) could tell the Court with any confidence when the Decedent stated his intentions. Statements such as those recalled by these witnesses are, of course, less persuasive if they occur significantly before the drafting of the Will or if it is difficult to place the time of the statements. I do not question that these witnesses are telling the truth as they know it, but, in light of the factors informing their testimony, I give their testimony less weight. I am satisfied that the Decedent's intent is best ascertained by considering the testimony of MacGray — a disinterested witness who discussed the Decedent's dispositive intent in detail with him during the process of preparing and executing the Will.
* * *
The Will is ambiguous. The assets of the Decedent, in accordance with the terms of the Will, pass to the residuary trust, a trust for which there is no dispositive provision. When confronted with an ambiguous will or trust, the Court's function is to ascertain, and give effect to, the testator's intent.
The cardinal rule of law in a trust [or will] case is that the intent of the settlor [or testator] controls the interpretation of the instrument. "Such intent must be determined `by considering the language of the trust instrument [or will], read as an entirety, in light of the circumstances surrounding its creation.'" All other rules of construction must be subordinate to determining [the] settlor's [or testator's] intent, their value being as aids in ascertaining that intent as precisely as possible.
Chavin v. PNC Bank, Delaware, 816 A.2d 781, 783 (Del. 2003) ((quoting Chavin v. PNC Bank, Delaware, 2002 WL 385543, at *2 (Del.Ch. Mar. 4, 2002) (quoting Annan v. Wilmington Trust Co., 559 A.2d 1289, 1292 (Del. 1989) (internal citations omitted))); In re Dixon's Will, 280 A.2d 735, 737 (Del.Ch. 1971).
Accordingly, the Court now turns to an evaluation of the language of the Will and the extrinsic evidence that sheds light on the Decedent's dispositive intent.
* * *
The dispositive terms in the Will, written to govern assets in the marital trust, read, in pertinent part, as follows:
On the death of my said wife, Trustees shall distribute the balance of the principal as follows:
A. My Executor shall distribute fifty thousand dollars ($50,000) to each of my children and each of the children of my wife, Dorothy E. Shank who are living at the time of my death.
Initially, it appears that the provision tells the trustees what to do "on the death of [Mrs. Shank]," (suggesting that these instructions are to be implemented after both the Decedent and Mrs. Shank have passed on) with respect to the "balance of the principal" (suggesting that this addresses funds left over in the trust). However, the provision states that the "Executor" is to make the distribution (in addition to language authorizing the trustees to make the distribution). A distribution by an executor suggests a payment from the estate as part of the estate administration process. The use of the term "executor" is most likely a misnomer. The timing provision — "on the death of my said wife" is a solid indicator, along with the initial direction to the "trustees," that the distributions to the children of both the Decedent and Mrs. Shank were to occur from the trust after the death of Mrs. Shank. This reading, of course, is consistent with MacGray's recollection of the Decedent's testamentary goal of providing for Mrs. Shank.
It appears that this language was copied from Mrs. Shank's will without appropriate revision. Mrs. Shank's will does not establish any trust. See PX 7.
I look to the dispositive provisions of the marital trust because the Will contains no other comparable guidance as to the Decedent's intent. The parties have done likewise.
Another factor also suggests that the Decedent intended that the individual bequests be paid after Mrs. Shank's death, if she survived him. The most that would go into the residuary trust was $600,000, as determined by reference to the amount that could be sheltered by the tax credit. If the individual bequests were paid at the outset, only $250,000 would remain in that trust. A purpose of a residuary, or credit shelter, trust is to provide a source of income for the surviving spouse. That general purpose is also consistent with the Decedent's intent to provide for his spouse. To pay out more than half of the trust principal at the outset would not be consistent with that purpose. More importantly, if the Decedent had intended for the gifts to the Respondents and the Stepchildren to have been paid from the estate (or from the trust shortly after its creation), it would have been easy to provide for that.
This does raise another concern, however. The standard by which trustees may make distributions from the typical marital trust are more accommodating to the surviving spouse's wishes than the typical bypass trust standards. Even with a more restrictive standard, it is possible that the trustees could dissipate the assets in the residuary trust to the point where the $50,000 bequests could not be funded on Mrs. Shank's death. That result, of course, would frustrate the Decedent's clear intention as to ultimate gifts to his children and the Stepchildren. That possibility, however, is a risk inherent in the marital trust/bypass trust testamentary scheme.
I acknowledge the possible argument that during administration of the estate, the income from all sources would be available to Mrs. Shank. The income from the assets that would be used to fund the individual bequests could for some time be used to subsidize her through this difficult period. Income from assets of the Decedent having a value of $350,000 (seven bequests of $50,000) over such a short period would have been relatively minimal.
One of the more interesting questions is the Decedent's net worth. Several of the witnesses, including, significantly, MacGray, were told or believed that the Decedent was worth in excess of one million dollars. Yet, the amended inventory filed by Mrs. Shank, as executrix of the Decedent's estate, reflects a net worth (including jointly held property of $175,901.90) of only $580,406.69. The reasons for the discrepancy are not apparent. If the Decedent's worth exceeded one million dollars when he executed his Will, it would have made sense, at least from an estate planning perspective, to employ the multiple trust approach. He also could have made a reasonable accommodation for his wife and have made the specific bequests totaling $350,000. However, if his assets were worth less than $600,000, it made little sense to set up separate trusts and, if his intent was to protect and to provide for his wife, no sense to have the bequests (amounting to more than half of his estate) paid promptly and from an apparently relatively illiquid estate. Ultimately, because the Court must seek to ascertain the intent of the Decedent as of the time he executed the Will, one cannot rely upon the amounts shown in the inventory to exclude the possibility that he intended to have the bequests paid following his death. Conversely, that he may have believed that he had sufficient funds to make the distributions at that time offers limited support for the Respondents' interpretation because, under those circumstances, a distribution from the estate would not have been palpably unwise. In short, Mrs. Shank's analysis of the Decedent's estate as support for her position that he could not have intended to have the gifts made on his death is entitled to little weight because what matters, for these purposes, is what he believed he had as of the time of the Will. On the other hand, that he may have believed he had in excess of one million dollars only makes it possible for him to have concluded that the gifts should be made following his death; it offers little guidance as to what he, in fact, intended.
PX 4. The Respondents have questioned the accuracy of this reporting.
For example, more than 80% of his individual estate consisted of real property or his interest in his closely held business.
I note that, even if the Decedent's net worth is significantly greater than indicated in the inventory, the liquidity questions involved with cash gifts of $350,000 remain open. With limited cash and cash equivalents (less than $60,000) reflected in the inventory, liquidation of a substantial portion of the Decedent's estate would be necessary to fund the gifts.
The Respondents point to other portions of the Will which they claim may be read to support the interpretation that they are currently entitled to payment of the individual bequests. First, they note that the class of the Decedent's children and Mrs. Shank's children is determined as of the date of the Decedent's death. They argue that, by determining the members of the class as of his death, the Decedent expressed his intent that the distribution be as a result of his death and not as the result of Mrs. Shank's death. The Respondents read too much into this provision. It simply provides a specific time for vesting and determining the beneficiaries.
This is consistent with Delaware's policy favoring early vesting. See 12 Del. C. § 3331 (enacted after the Decedent's death).
Second, the Will provides that none of the Respondents or the Stepchildren "shall be entitled to enforce [ inter alia, the $50,000 bequests] prior to 18 months subsequent to my death." The Respondents, in substance, argue that it would strange to postpone a right to enforce a gift by 18 months after the Decedent's death if he did not intend for the gift to be payable on, or as the result of, his death. It may be that this provision, also appearing in Mrs. Shank's will in the same wording, is simply another example of MacGray's "cutting and pasting" errors. More importantly, because it is procedural in nature, it does not overcome the specific language — "on the death of my wife" — which begins this provision and provides the best guidance of the timing of these gifts.
* * *
Although the outcome may not be wholly free from doubt, I am guided primarily by MacGray's testimony and the introductory language — "on the death of [Mrs. Shank]" — to the provision in the Will which grants the individual bequests. The Decedent's principal concern was the protection of his wife; that goal is best served by postponing the bequests. His directions — as we have them — were for the assets in question to pass into his residuary (or credit shelter) trust. Ultimately, the Respondents ask the Court to accept an unusual dispositional scheme for assets placed into such a trust. Ordinarily, the assets are to remain in the trust for the benefit of the surviving spouse; here, the Respondents ask that over half of the trust assets be distributed, to the exclusion of the surviving spouse, shortly after the trust's funding. Without more, the Court will not adopt such a construction.
Thus, for the foregoing reasons, I find that it was Decedent's intent that, after the gifts of personalty to Mrs. Shank and $10,000 to St. Andrews School, his entire estate would be placed in trust for the benefit of his wife, to whom the income would be paid not less often than annually and for whose benefit the trustees, in accordance with the standard employed in bypass trusts, could invade the corpus. On the death of Mrs. Shank, each of the Respondents and the Stepchildren is to be paid an individual bequest of $50,000. Any balance after the payment of the individual bequests shall be distributed in accordance with the terms of the Will: in general for the benefit of the grandchildren.
See note 8, supra.
The petition for instructions sought guidance on the timing of the $50,000 bequests. The disposition of the balance is not at issue.
Counsel are requested to confer and to submit a form of order to implement this letter opinion.
Resolution of Respondents' application for an award of counsel fees is deferred in order to allow the parties an opportunity to address the impact, if any, of this decision on that application.