Opinion
No. 3-136 / 02-0841
Filed June 13, 2003
Appeal from the Iowa District Court for Story County, Timothy J. Finn, Judge.
Three trust beneficiaries appeal from a district court ruling that refused to terminate the trust, and removed one the beneficiaries from his position as cotrustee. AFFIRMED.
Kenneth Rittgers, Des Moines, for appellants.
James Brewer and Angelina Thomas of Newbrough, Johnston, Brewer, Maddux Howell, L.L.P., Ames, for appellee.
Heard by Zimmer, P.J., and Hecht and Eisenhauer, JJ.
Three brothers, residual trust beneficiaries, appeal from the district court's refusal to terminate the trust for impossibility. They further appeal the court's decision to remove one of the brothers from his position as cotrustee, and to allow their step-father, the primary beneficiary and other cotrustee, to nominate a successor. We affirm.
Background Facts and Proceedings . Robert and Judith Rowe were married in 1980. Robert had children from a previous marriage, and Judith had three sons from a previous marriage, Jon, Lee and Brad Seibert. Following the marriage, Robert moved into Judith's mortgaged home. He made the mortgage payments on the home for the next eight years. In 1988, using funds from the sale of the home and Judith's inheritance from her mother, the couple purchased a new residence. The new home was titled in the name of Judith and Robert as joint tenants.
In 1991, Judith became ill with cancer but was successfully treated. Unfortunately, her cancer reoccurred, in a terminal form, in 1998. In June 2000, Judith and Robert executed a revocable living trust agreement, and deeded their residence to the trust. The trust agreement named Robert and Judith as both trustors and initial trustees. Upon the death or incompetency of either Robert or Judith, Judith's son, Brad Seibert, was to be made successor trustee. His brother Lee was named second successor trustee.
The agreement provided that the trust would continue after Judith's death. As long as Robert desired, he was to be allowed to live in the residence "without rent," and the trust income and principal were to be used to "maintain, repair, insure and pay taxes on the residence." The home could not be sold, during Robert's lifetime, without his consent. The agreement further provided that, at the death of both Robert and Judith, the "rest, residue and remainder" of the trust property was to be distributed to Lee, Jon and Brad.
Robert and Judith continued to pay the taxes and other expenses of the residence, including payments on a small home-improvement mortgage the couple took out in the mid-1990s. When Judith died in May 2001, the trust became irrevocable, and Brad became Robert's cotrustee. Robert, now retired and with limited income, expected the trust to take over maintenance and all other payments on the home. He ceased making tax and mortgage payments.
The house is the trust's only asset. Robert and Judith had intended, but failed, to transfer additional assets into the trust prior to Judith's death. While Judith's will named the trust as the residual beneficiary, her estate was inadequate to meet even specific bequests.
In October 2001 Brad, Lee and Jon petitioned to terminate the trust for impossibility pursuant to Iowa Code section 633.2201(1)(c) (2001). They requested that the property be sold and the proceeds divided, and that Robert be required to make all mortgage and other payments until the home was sold. On April 26, 2002, following a contested hearing, the district court filed its ruling and denied the petition to terminate. It found the primary intent of the trust was to allow Robert to live "rent-free" in the home for life. It found this purpose could be fulfilled, as the trustees were empowered to encumber the residence, and the residence had equity against which the necessary funds could be borrowed. The court directed the trustees to so encumber the residence. Brad, who had expressed a refusal to take such action, was removed as cotrustee. Robert was directed to nominate a successor.
On May 9 the brothers filed a motion to reconsider pursuant to Iowa Rule of Civil Procedure 1.904(2). They re-advocated their request to terminate the trust and sell the house, but also appeared to propose an alternative solution — that Robert remain in the home but be required to pay the mortgage and other expenses. They also argued that Brad should be allowed to continue as cotrustee, or that Lee be appointed to succeed Brad. On May 24, 2002, before the court had ruled on their rule 1.904(2) request, Jon, Lee and Brad appealed the April 26 ruling. On June 27, 2002, the court denied the rule 1.904(2) motion. It determined that Lee was not an appropriate person to replace Brad, and appointed the individual nominated by Robert.
Scope of Review . Equitable proceedings are reviewed de novo. Iowa R.App.P. 6.4. This includes the interpretation of trust agreements by the district court. Barron v. Snapp, 468 N.W.2d 841, 843 (Iowa Ct.App. 1991). We give weight to the court's factual findings, but are not bound by them. Id.
Termination of the Trust . The brothers claim the trust should be terminated because the "trust purpose" has become "impossible to fulfill." Iowa Code § 633.2201(1)(c). Thus, as an initial matter, the trust purpose or purposes must be assessed. To do so we examine "the language of the instrument which creates the trust and the surrounding circumstances." Eldred v. Merchants Nat. Bank of Cedar Rapids, 468 N.W.2d 221, 223 (Iowa 1991).
Based on testimony from Robert and the brothers, it is clear that Judith and Robert had two goals in mind when establishing the trust. They wanted to provide Robert a place to live until his death, while also making sure that the home would be inherited, not by Robert's children, but by Judith's. The brothers argue the primary purpose of the trust was preserving the home, intact and largely unencumbered, until such time as it is distributed to them under the trust. Robert contends the primary purpose of the trust is to provide him a home for life.
While this is the position the brothers take on appeal, in their rule 1.904(2) motion they characterized their own interest as important, yet secondary.
An examination of the trust instrument supports Robert's position. The primary thrust of the instrument is providing Robert a home, without payment of rent or expenses, as long as he wishes. The brothers' interest is limited to that of remaindermen. Under the terms of the instrument the residual distribution to the brothers is secondary to not only Robert's interest as a trustor, but also to the payment of Robert's last illness, funeral and burial expenses, as well as taxes and the debts and expenses of administration. One such contemplated debt is the mortgage of trust property.
We must also consider the surrounding circumstances. There can be little doubt that Judith wished for the home to pass to her sons after Robert's death. We cannot ignore the fact, however, that Robert voluntarily entered into the trust agreement, giving up his right to sole ownership of the home upon Judith's death.
We agree with the district court that providing Robert a lifetime home was the primary purpose of the trust, and that it is still possible to fulfill that goal by mortgaging the property. The home is worth $250,000, and is presently encumbered by only the $28,000 home-improvement mortgage. Although Jon opined that it would be difficult to obtain a reverse mortgage on the home, there had been no attempt to obtain such a mortgage prior to the hearing. The evidence fell far short of demonstrating that it was impossible for the trust to maintain the home for Robert's use.
As a general matter, a trust is terminated only where all the purposes for which the trust were created become impossible to fulfill. Restatement (Third) of Trusts § 30 cmt. a (2003). The brothers point out that a reverse mortgage might well exhaust the home's equity during Robert's lifetime, leaving no trust property remaining for distribution. The fact that a reverse mortgage might eventually deplete all of the trust assets does not negate the trustees' duty to carry out the intent of the trust to provide a rent-free residence for the trustors. As noted by the district court, the "remaindermen do not have a legal right to protect their remainder interest by destroying the primary purpose of the trust." We agree with the district court that the brothers have not demonstrated grounds for terminating the trust under Iowa Code section 633.2201(1)(c). See also Iowa Code § 633.1104 (providing that trust code modifies, and is supplemented by, common law); Hopp v. Rain, 249 Iowa 891, 900-901, 88 N.W.2d 39, 44-45 (1958) (citations omitted) ("[W]here it appears the creator of a trust had in view a valid purpose which would be defeated by a termination of the trust before the time set by him the courts will not decree a termination so long as the purpose is capable of being accomplished. . . .").
Modification of Trust Terms . The brothers alternatively argue that the terms of the trust should be modified, to require Robert to make all mortgage, tax and other payments so long as he resides in the home. They cite to Iowa Code section 633.2204, and its provision that "the court may modify the administrative provisions of the trust, if, owing to circumstances not known to the settlor and not anticipated by the settlor, the continuation of the trust under its terms would defeat or substantially impair the accomplishment of the purposes of the trust." However, the brothers did not plead the necessity of modification, only termination. Nothing in the record demonstrates that a modification argument was made before or during the district court hearing. Nor did the district court rule as to the propriety of modifying the trust terms. An issue neither raised to nor ruled upon by the district court is not preserved for our review. Metz v. Amoco Oil Co., 581 N.W.2d 597, 600 (Iowa 1998).
In its ruling the court set forth various legal provisions, including section 633.2204. However, it never identified modification of the trust as an issue presented to it, or otherwise addressed modification in its ruling.
It is arguable that a modification request was made, without citation to a specific code provision, within the brothers' rule 1.904(2) motion. However, we see nothing in rule 1.904(2) that authorizes its use to raise a previously unstated legal argument. On the contrary, the general judicial economy goals underlying our error preservation rules indicate the impropriety of such an action. See Top of Iowa Co-op. v. Sime Farms, Inc., 608 N.W.2d 454, 470 (Iowa 2000) (ensuring that opposing party and court are alerted to issue at a time when corrective action can be taken, and that judicial resources are preserved by avoiding unnecessary proceedings). Moreover, the brothers filed their appeal prior to the district court's ruling on their post-trial motion. They are therefore deemed to have waived and abandoned the argument. IBP, Inc. v. Al-Gharib, 604 N.W.2d 621, 628 (Iowa 2000).
Even if we were to address the merits of their claim, it would fail. The brothers advance only one ground for elevating their own interest over that specifically granted to Robert by the terms of the trust. They claim Robert is effectively a "life tenant," and therefore obligated to avoid waste. Like the district court, we find this argument without merit. Unlike a life tenant, who takes title outright, Robert does not have legal ownership over the home. See Hamilton v. Mercantile Bank of Cedar Rapids, 621 N.W.2d 401, 410 (Iowa 2001) (noting that in a trust "legal and equitable ownership of the land are severed").
In conjunction with this argument the brothers emphasize the fact that Robert made all the necessary payments prior to Judith's death. However, at that time, Robert and Judith were not only the trustors, but the initial trustees.
Cotrustee . The brothers seek to have Brad remain as cotrustee, or to have Lee appointed in his place. As Brad clearly indicated his unwillingness to encumber the home, we find no error in his removal. See Iowa Code § 633.4107(2)(c) (allowing a court to remove a trustee "[i]f hostility or lack of cooperation among cotrustees impairs the administration of the trust"). Because the issue of appointing Lee was first raised in the rule 1.904(2) motion, it was arguably waived. IBP, Inc., 604 N.W.2d at 628.
Even if we address the merits of the argument, we too conclude that Lee should not be appointed to serve as Robert's cotrustee. The brothers correctly note that Lee did not testify, and thus never expressed an unwillingness to administer the trust under its current terms. However, it is reasonable to conclude from Lee's adversarial posture as a co-petitioner that he would also be unwilling to encumber the residence. We find no error in the district court's failure to appoint Lee as successor trustee. See Restatement (Third) of Trusts § 37 cmt. a ("the court will refuse to appoint a person as trustee under circumstances that would warrant the person's removal as trustee").