Opinion
Editorial Note:
This opinion appears in the reporter in a table titled "Supreme Court of Kansas Decisions Without Published Opinions". These opinions are not precedents and cannot be cited or relied upon unless used when establishing res judicata or collateral estoppel or in actions between the same party. (Supreme Court Rule 7.04)
Appeal from Sedgwick district court; Timothy G. Lahey, Judge.Dan C. Peare and Ryan D. Farley, of Hinkle Elkouri Law Firm L.L.C ., of Wichita, were on the brief for trustee, Helen M. Suhr.
There were no other appearances.
MEMORANDUM OPINION
PER CURIAM:
This is an appeal from a district court judgment reforming a 1999 non-charitable trust established by Paul F. Suhr. Reformation was based on the provisions of K.S.A. 58a-416 of the Kansas Uniform Trust Code (KUTC) for the purpose of accomplishing the settlor's original intent to reduce or eliminate federal estate taxes in his spouse's estate by passing on part of her life interest in his estate to children and grandchildren. We affirm.
FACTS
In July 1999, Paul and Helen Suhr sought the advice of counsel regarding their estate plan. Based upon advice given they created revocable living trusts with the intent to reduce or eliminate federal estate taxes, thereby passing on as much wealth as possible to their children and grandchildren tax free. Paul and Helen were advised that the trust agreements they signed would accomplish their intent.
Paul's revocable living trust provided for the creation of a credit shelter trust if Grantor's wife (Helen) survived Grantor (Paul). Paul died on June 22, 2006. Sometime later, Helen was informed that the trust as drafted, because of a scrivener's error, did not fully use Paul's applicable exclusion credit, and therefore did not accomplish Paul's goals of reducing or eliminating federal estate taxes and transferring wealth to his lineal descendants tax free. Based on this information, Helen, as trustee, filed a petition in Sedgwick County District Court to modify the trust pursuant to K.S.A. 58a-410(b), which permits a trustee to seek and obtain the court's approval of a proposed modification of a trust pursuant to K.S.A. 58a-411 through K.S.A. 58a-417. Specifically, K.S.A. 58a-416 provides that the court may retroactively modify a trust to achieve the grantor's tax objectives in a manner that is not contrary to the grantor's probable intentions.
The petition requested that the court order modifications effective retroactively to July 1, 1999, in order to accomplish the Suhrs' originally intended " goal of reducing or eliminating federal estate taxes." In support of the reformation, the petition included an affidavit of Helen Suhr indicating that the Suhrs' objective was " to pass as much wealth as possible on to their children and grandchildren tax free."
This action was filed in the district court; all identifiable beneficiaries of the trust received actual notice of the proposed reformations; there were no objections to the reformations in the record. The Internal Revenue Service (IRS) was not notified of the proceedings. However, as this court has previously held, that lack of notice presents no difficulty:
" The petitioner's failure to notify the IRS does not affect the outcome of these proceedings.... [T]he IRS would not have standing to object to the proceedings because the taxing event had not yet occurred. See In re Harris Testamentary Trust, 275 Kan. [946], 962, 69 P.3d 1109 [2003] (upholding modification of trust for tax purposes even though no indication IRS notified of proceedings and key taxing events had not occurred at time action filed). This concision is further supported by the IRS's failure to enter an appearance in two previous cases where it did receive notification. See In re Estate of Keller, 273 Kan. [981], 985, 46 P.3d 1135 [2002]; In re Estate of Smith, No. 89,691, unpublished Supreme Court opinion filed December 12, 2003." In re Estate of Simons, No. 91,155, unpublished opinion filed March 26, 2004.
Upon hearing, the district court found that notice of the hearing had been provided to all of the beneficiaries of the trust as required by law. No objections to the proposed reformations were in the record. The district court, based upon the record, determined that the original intent of the settlor could be accomplished by reforming the trust under the provision of K.S.A. 58a-416 consistent with petitioner's request. Modifications to the trust were adopted by the district court retroactive to the date of creation as memorialized in its journal entry.
Trustee Helen M. Suhr appealed from this favorable ruling by the district court. We transferred the appeal to this court from the Court of Appeals based upon the holding in Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967) (the IRS is bound by the reformation of a trust only when the reformation is approved by a state's highest court). Our jurisdiction is based on K.S.A. 20-3018(c).
Discussion
Ordinarily, appellate courts do not have jurisdiction to review cases that lack adverse parties. See In re Estate of Keller, 273 Kan. at 985, 46 P.3d 1135. This court has recognized an exception to this rule authorized by Kansas' Declaratory Judgments Act, K.S.A. 60-1701 et seq. , however, when reviewing the construction of wills and other testamentary instruments with federal tax implications. As the court explained in Keller:
" The necessity for an appeal in this case is based on the United States Supreme Court's holding in Commissioner v. Estate of Bosch, 387 U.S. 456, 87 S.Ct. 1776, 18 L.Ed.2d 886 (1967). Bosch held that the IRS and federal courts are not bound by lower state court decisions but must instead merely give those decisions ‘ proper regard.’ On matters of state law, deference is given to decisions rendered by the state's highest court. 387 U.S. at 465." 273 Kan. at 985-86, 46 P.3d 1135.
In this case, the court similarly has jurisdiction under the Declaratory Judgments Act to review the propriety of the trustee's reformation of the trust at issue. See In re Harris Testamentary Trust, 275 Kan. 946, 69 P.3d 1109 (2003). Because declaratory judgments are final decisions, this court has authority to consider the merits of the trustee's appeal under K.S.A. 60-2102(a)(4) and K.S.A. 20-3018(c).
The trustee asks this court to affirm the district court's approval of the retroactive reformation of Paul's trust. As the previous factual statements indicate, the impetus for the trust reformation was to assure that the Suhrs' intentions in creating the trust were carried out and that funds in the trust were not depleted by unwarranted estate taxes that resulted from inartful drafting.
Standard of Review
While some cases involving reformation may require the court to review the evidence supporting the district court's findings of fact before it may determine whether those findings support the district court's legal conclusions, this case does not require any such determination. Rather, the underlying facts regarding the Suhrs' intentions were never contested. Instead, the trustee presented proposed findings, which were adopted by the court.
This court reviews cases decided on the basis of documents and stipulated facts de novo. See Crawford v. Hrabe, 273 Kan. 565, 570, 44 P.3d 442 (2002). As was the case in Harris, the " question before this court is whether Kansas law supports the actions of the district court in its reformation of the Trust" -a legal question over which this court exercises unlimited review. 275 Kan. at 951, 69 P.3d 1109.
Analysis
To accomplish Paul's goals, the district court modified Article VI, paragraph A, subparagraph 1, to now provide:
" To my wife HELEN M. SUHR and LYLE K. SUHR as Co-trustees, in trust to be known as the Paul F. Suhr Family Trust, so much of my income producing property as shall fully use my available unified credit." (Emphasis added to show new language.)
The original wording had been:
" To my wife HELEN M. SUHR and LYLE K. SUHR as Co-trustees, in trust to be known as the Paul F. Suhr Marital Family Trust, so much of my income producing property as shall equal my remaining unified credit but in no event shall the value of such property be greater than Six Hundred Fifty Thousand Dollars ($650,000) as valued for estate tax purposes or such amount as allowed by the Internal Revenue Service for such unified credit at the time of my death. " (Emphasis added to show eventually removed language.)
Further, the district court also modified Article VI, paragraph A, subparagraph 4, to give Helen a limited power of appointment. It now provides:
" Upon the death of my spouse, such part or all of the then remaining principal of the trust and any accrued or undistributed net income thereof shall be distributed to or for the benefit of such one or more persons or organizations as my spouse may appoint by will, trust, or other testamentary document specifically referring to this power of appointment. In no event shall my wife have the power to appoint any assets of the Family Trust to herself, to her estate, to her creditors, or to the creditors of her estate. " (Emphasis added to show new language.)
The original wording had been:
" Upon the death of my spouse, such part or all of the then remaining principal of the trust and any accrued or undistributed net income thereof shall be distributed to or for the benefit of such one or more persons or organizations or the estate of my spouse as my spouse may appoint by will, trust, or other testamentary document specifically referring to this power of appointment." (Emphasis added to show eventually removed language.)
As originally drafted, that subparagraph had created a general power of appointment in Helen, because the trust had given her the right to appoint assets to anyone, including her estate or creditors of her estate. As the district court noted, a general power of appointment is defined by the Internal Revenue Code of 1986, as amended (the Code), as a power that " is exercisable in favor of the decedent, his estate, his creditors, or the creditors of his estate." 26 U.S.C. § 2041(b)(1) (2000). The result of a power of appointment being classified as a general power of appointment is that the assets subject to the power will be included in the powerholder's estate at death and thus will be taxable to the powerholder. This was clearly not what the Suhrs had intended.
However, as a result of the drafting error, Paul's trust did set aside assets to Helen in a " Marital Trust" that had been subject to a general power of appointment. The power of appointment language effectively eliminated any purpose of setting aside an amount to pass to Paul's lineal descendants tax free under Paul's available applicable exclusion amount.
Consequently, unless modifications are permitted, the assets of the " Marital Trust," originally intended to be able to pass estate tax free pursuant to take full advantage of Paul's unified credit, would be less than originally intended and would be unintentionally taxed upon Helen's death. The district court's retroactive reformations fixed these problems " to achieve the [settlor's] tax objectives."
K.S.A. 58a-416 provides the following: " To achieve the settlor's tax objectives, the court may modify the terms of a trust in a manner that is not contrary to the settlor's probable intention. The court may provide that the modification has retroactive effect."
The district court found that all of the beneficiaries of the trust received notice of the petition for reformation as required by law. No objections to the reformations were in the record.
The district court found that
" the Marital Trust was to be funded with an amount equal to the Grantor's unified credit amount. However, as written, the Trust does not take full advantage of Grantor's applicable exclusion amount that existed at the time of Grantor's death, increasing the amount of Grantor's estate that will eventually be subject to federal estate taxes."
The district court found that " part of Grantor's and Petitioner's intent in creating their individual revocable trusts was to use their applicable exclusion amounts to reduce or eliminate as much federal and state estate tax as possible. As written, the Trust does not accomplish this goal."
There is no question in this case that Paul and Helen Suhr intended to maximize the amount of Paul's unified credit that would be allowed by the IRS at the time of his death to fund the trust originally. The first retroactive modification of the district court fixed this problem.
The petition for modification noted that the trust was created " to reduce or eliminate federal estate taxes and to pass as much wealth as possible to [the Suhrs'] children and grandchildren tax free." The affidavit submitted to the district court by Helen Suhr supported this. However, the unreformed trust wording would unintentionally have prevented this goal from being realized. Both retroactive modifications of the district court fixed these problems.
The trust's original wording did not allow the Suhrs' intentions to be met, contrary to their tax objectives. Consistent with K.S.A. 58a-416, the retroactive reformations made by the district court to Paul's trust accomplished the tax and other objectives of Paul and Helen Suhr.
We conclude that the changes made by the district court are in accord with the probable intent of Paul and Helen Suhr and were, thus, authorized by K.S.A. 58a-416. The district court properly exercised its authority thereunder to retroactively modify the trust " to achieve the settlor's tax objectives." We, therefore, affirm the district court and adopt the changes granted by the district court.
Affirmed.