[WSBAPT] Authority for Irrevocable Credit Trust

Thu Jun 7 11:51:56 PDT 2018

Thanks for those cites.  Very useful.  The cite about administering the trust solely in the interests of the beneficiaries is interesting, but in the Oregon version of the Uniform Trust Code other sections make it clear that the interests of the beneficiaries are not defined by the beneficiaries, but instead are defined by the terms of the trust.  So if the beneficiary wants to drive a Porsche, the terms of the trust might provide (or the trustee might apply the terms of the trust to provide) that the beneficiary will drive a Honda Fit.  I don't recall if the Washington statutes say the same thing.
This is not to say that the views of the beneficiary will be ignored.  It is to say that the trust governs, and the views of the beneficiary are secondary, at best, if the trust has relevant language.
Phil Jones
Portland, OR

From: wsbapt-bounces at lists.wsbarppt.com [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Jen Doehne
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Subject: Re: [WSBAPT] Authority for Irrevocable Credit Trust

Hi Philip - this is some of what I have re case law and research (cut and paste from my Motion):

RE Terms of Trust: In construing the terms of a trust, the settlor's intent controls.  Eisenbach v. Schneider, 140 Wn.App. 641, 651, 166 P.3d 858 (2007).  When possible, the settlor's intent must be determined from the language of the trust instrument as a whole, giving effect to each part of the trust instrument.  In re Estate of Sherry, 158 Wn.App. 69, 78, 240 P.3d 1182 (2010); Eisenbach, 140 Wn.App. at 651.  Although, in general, determining a settlor's intent is a question of fact, the interpretation of a trust provision is a question of law.  Sherry, 158 Wn.App. at 76; Eisenbach, 140 Wn.App. at 651.  If a trust's language is unambiguous, the trust does not require either interpretation or construction.  Templeton v. Peoples Nat'l Bank of Wash., 106 Wn.2d 304, 309, 722 P.2d 63 (1986).  A trust term is not ambiguous unless the language is susceptible to more than one reasonable interpretation.  Waits v. Hamlin, 55 Wn.App. 193, 200, 776 P.2d 1003 (1989).  Accordingly, where a trust's language is unambiguous, a Court may not alter the settlor's intent by interpreting or construing the language used otherwise.  Templeton, 106 Wn.2d at 309.

RE Irrevocability: "Bypass trusts are sometimes referred to as 'credit shelter,' 'exemption,' or 'family' trusts...The bypass trust is irrevocable after the death of the first spouse..."  Business Transactions Solutions, May 2018 Update (Alan S. Gutterman) § 20.25. Dicta in case law indicates Credit Trusts are irrevocable after the death of the first spouse.  See, e.g. In re Estate of Haviland, 162 Wn.App. 548, 552-53, 255 P.3d 854 (2011) (mentioning a trust scheme similar to the present matter where the credit trust was irrevocable).

I do discuss the tax benefit under 26 C.F.R. § 20.2041-1 but I do not dwell on it because, while at the death of the first spouse the estate was taxable (and the 706 was filed for portability purposes), at the death of the second spouse, the estate was not taxable.

RE Duty to Beneficiaries: Washington courts have held that, unless otherwise stated within the plain language of the trust, the intent of the Grantor in creating a Credit Trust is not only to avoid or offset taxes but also to benefit all of the named beneficiaries. See In re Estate of Martin, 116 Wash.App 1038, 2003 WL 1908066 (2003). . . . The Trustee is under a duty to the beneficiaries to administer the trust solely in interest of those intended beneficiaries: Decedent's children.  See In re Johnson's Estate, 187 Wash. 552, 60 P.2d 271 (1936).

RE Funding: If a trustee is a conscious wrongdoer, the beneficiary is entitled to enforce a constructive trust upon the property but only to share proportionately in the value of the acquired property. Bird v. Stein, 258 F.2d 168, 178 (5th Cir. 1958). . . . The general rule applicable to tracing trust funds is stated in Redfield v. Johnson, 159 Wash. 39, 291 P. 1077, 1078 (1930): "And no rule is more fully recognized than the rule that a cestui que trust may follow trust funds wrongfully diverted through all its changes, and recover the fund from any property into which it has gone." See also Smith v. Fitch, 25 Wash. 2d 619, 627, 171 P.2d 682, 686 (1946).
RCW 11.98.078(1)-(3) state, in pertinent part:

(1) A trustee must administer the trust solely in the interests of the beneficiaries.
(2) Subject to the rights of persons dealing with or assisting the trustee as provided in RCW 11.98.105, a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee's own personal account or which is otherwise affected by a conflict between the trustee's fiduciary and personal interests is voidable by a beneficiary affected by the transaction . . .
(3)(a) A sale, encumbrance, or other transaction involving the investment or management of trust property is presumed to be "otherwise affected" by a conflict between fiduciary and personal interests under this section if it is entered into by the trustee with:
(i) The trustee's spouse or registered domestic partner;

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Philip N. Jones
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Subject: Re: [WSBAPT] Authority for Irrevocable Credit Trust

I have always been interested in the question of the failure to fund a credit shelter trust following the first death.  That question seems to come up from time to time (fortunately not frequently).  I have always felt that the trustee (and any successor trustee) has a continuing obligation to cure the breach of fiduciary duty and to fund the trust, no matter how late the funding might be.  You indicated you have found extensive case law.  If you would be willing to share those cites, or some of them, that would be very nice, particularly if the cites come from Oregon or Washington.  I practice right on the border between the two states, and practice in both states, so any such cites would be much appreciated.  But cites from other states would also be helpful.
Phil Jones
Portland, OR

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Jen Doehne
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Subject: Re: [WSBAPT] Authority for Irrevocable Credit Trust

We are trying to compel the funding of the trust and argue that it was always contemplated by decedent to be irrevocable.

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Rod Harmon
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Subject: Re: [WSBAPT] Authority for Irrevocable Credit Trust

Are you trying to establish that no trust was created?
Or are you trying to compel the funding of the trust?

Rod Harmon

RODNEY T. HARMON
       Attorney at Law
         P.O. Box 1066
      Bothell, WA   98041
     Tel:   (425) 402-7800
     Fax:  (425) 458-9096
    www.rodharmon.com<http://www.rodharmon.com>
   rodharmon at msn.com<mailto:rodharmon at msn.com>

From: wsbapt-bounces at lists.wsbarppt.com<mailto:wsbapt-bounces at lists.wsbarppt.com> [mailto:wsbapt-bounces at lists.wsbarppt.com] On Behalf Of Jen Doehne
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Subject: [WSBAPT] Authority for Irrevocable Credit Trust

Hi Everyone-
I am working on a very contentious case where the main issue is a Credit Trust whereby the surviving spouse grantor failed to fund it and attempted to make several amendments to it (such as changing beneficiaries). I have completed hours of research and have found many cases whereby the court states in dicta that the Credit Trust is irrevocable and must be funded but I have found no statutory backing.

The Credit Trust itself says that "Each Grantor while living reserves the right as to the assets transferred to, attributable to, or derived from, property contributed by such Grantor. . ." and further that "Trustee shall allocate to the Credit Trust an amount of property from the decedent's one half interest in the community property of the Trust Estate (and if insufficient, from the Decedent's separate property of the Trust Estate) equal to the minimum otherwise unused pecuniary amount necessary to exhaust the maximum unified credit . . ."

So far the wording of the Trust itself is my best argument that the Credit Trust is irrevocable and must be funded at the first spouse's death. Does anyone know of any statutory or actual case law that may shed light on this?

Thank you so much! Best wishes,

Jen
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