Regularly Review Those Estate Planning Documents

May 16, 2017
Kristine A. Tidgren

“Ademption” isn’t a doctrine often discussed outside of law school classrooms. But a recent case from the Iowa Supreme Court signals that it’s time for a refresher. Steinberg v. Steinberg, 2017 Iowa Sup. LEXIS 44 (April 28, 2017) illustrates the sometimes unexpected impact this doctrine can have on an estate plan. It’s also an exemplar for the need to regularly review estate planning instruments.

What is Ademption?

Ademption is broadly defined as a “taking away” of a specific bequest from a will or trust before the death of the testator. In other words, if a will directs that 20 shares of IBM stock be given to Joe at the testator’s death, that bequest is adeemed if the testator no longer owns IBM stock when he dies. In other words, Joe won’t get the gift. But what if the testator merely traded the IBM stock for Exxon stock? Was it his intent that Joe receive nothing? Different jurisdictions answer these nuanced fact patterns differently. In its most recent ademption case, the Iowa Supreme Court has taken a fairly rigid approach. In most cases, it appears, ademption will apply in Iowa if the character of the property listed in the will or trust has changed by the time of the testator’s death.

Facts of the Case

This was a battle between brothers, Steven and David. Their parents had created a revocable living trust in 2000. The parents and their son Steven were appointed co-trustees.  At the death of the last spouse, the trust was to become irrevocable and David was to become a co-trustee with Steven. David and Steven were the only beneficiaries of the trust.

The trust provided that, at the death of the parents, David was to receive a house in Buffalo Center and a 40-acre parcel of farmland in Winnebago County. Steven was given the “first right to purchase or rent [David’s] interest in [the parcel of farmland] for $1,500 per acre and [could] exercise that right at any time.” Steven was also given a parcel of farmland in Winnebago County. The trust provided that any other property remaining in the trust at the death of the last parent would be split equally between the two brothers.

After the father died, but five years before the mother died, the mother and Steven, as co-trustees, used IRC § 1031 to complete a like-kind, tax-deferred exchange of the Iowa parcel gifted to Steven in the trust for an 80-acre parcel of farmland in Minnesota. The trust was never updated to reflect this exchange.

Court Decision

At the death of the mother, the brother’s disagreed as to how the property should be distributed. David argued that he was entitled to half of the Minnesota property because the specific gift of the Iowa parcel to Steven had been adeemed. Steven argued that ademption did not apply because the Minnesota property was merely a replacement of the Iowa property gifted to him in the trust.     

The Court sided with David, as had the trial court. The Court affirmed Iowa’s “modified intention” approach to ademption cases. This approach specifies that if a piece of specifically gifted property is not in the estate at the time of the testator’s death, the bequest is adeemed, with one exception. The exception is that if the bequeathed property was disposed of without the testator’s knowledge or consent, ademption does not apply. Bottom line, ademption will apply in Iowa unless the sale occurred involuntarily or the testator (or trustee) was incompetent.

Steven urged the Court to apply §2-606(a)(5) of the Uniform Probate Code, which provides that ademption will not apply if the testator purchased “replacement” property for otherwise adeemed property. In other words, the UPC directs in such cases that the beneficiary receive the replacement property instead of the specifically gifted property that has been sold. The Court declined Steven’s invitation. The Court stated that the Iowa Legislature has had ample time to incorporate this provision of the UPC into the Iowa Probate Code and has never done so. The Court thus ordered that David was entitled to one-half of the Minnesota property.

The court did side with Steven on the other issue raised by the case. David argued that Steven’s “first right to purchase” David’s Iowa property was void because the parcel was gifted to David without limitation. He also urged that the only possible right Steven was given by the trust was the option to rent the farmland from David for $1,500 an acre (no, that’s not a typo) while David owned it. Steven argued that the right to purchase or rent phrase granted Steven the right to purchase David’s parcel for $1,500, and he sought to exercise that right. The Court first ruled that the gift to David and the right of Steven to purchase or rent the parcel could be reconciled. In other words, Steven’s right to purchase or rent was not inconsistent with David’s ownership interest. David would be the beneficiary of any purchase or rent proceeds.

The Court did find, however, that the language used in the trust was ambiguous:

“[Steven] shall be given the first right to purchase or rent [David’s] interest in [the parcel of farmland] for $1,500 per acre and [can] exercise that right at any time.”

Specifically, did the parents intend to give Steven the right to purchase the land at market value and rent it at $1,500 an acre or did they intend to allow Steven to purchase the land or rent it at $1,500 an acre? The Court noted that the latter interpretation would reduce the value of David’s gift from $380,000 (which is the current FMV) to $60,000.  

The Court remanded the case to the district court for a determination of the intent of the parents when they crafted the phrase.  Because the phrase was deemed ambiguous, outside evidence will be used to determine this intent. It would be hard to imagine a finder of fact determining that the parents intended a $1,500/acre rent for Steven.

Conclusion

The parents in this case seemed to have a great plan. They split their land between their sons, rather than saddling them with a tenancy in common. They created a trust in an attempt to more easily facilitate the smooth transfer of assets at their deaths. But, a poorly drafted “right to purchase” clause and a failure to update the trust upon the exchange of property spawned expensive litigation...litigation from which no one emerged victorious.

Bottom line: That plea to regularly review estate planning documents has a new supporting document.

The case is Steinberg v. Steinberg (In re Steinberg Family Living Trust), No. 16-0380 (April 28, 2017).

CALT does not provide legal advice. Any information provided on this website is not intended to be a substitute for legal services from a competent professional. CALT's work is supported by fee-based seminars and generous private gifts. Any opinions, findings, conclusions or recommendations expressed in the material contained on this website do not necessarily reflect the views of Iowa State University.

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