Attorney Fee Payment Properly Apportioned Between Trust Income and Principal

The Iowa Court of Appeals affirmed the probate court’s allocation of attorney fees and court costs arising from litigation under which the trust received a $159,250 settlement. Pointing to a clause in the trust document stating that “administrative costs” were to be paid from the income generated by the trust, the trust’s remainder beneficiaries argued that the expenses should be paid solely from the trust income. The Court found that litigation costs were not “administration costs.” Instead, the attorney fees and litigation expenses were to be paid in a way that ensured the fair treatment of all beneficiaries. This required paying some of the costs from the principal so as to not disadvantage the income beneficiary.

Facts

The R.J Wenck Trust was a testamentary trust with one income beneficiary and three different remainder beneficiaries. After the trust was established, the trust was involved in litigation. The trust received $159,250 in a settlement, which was allocated to the trust principal. The attorney fees and litigation expenses associated with the litigation totaled $52,016.78.

The trustee sought court approval to pay one-fourth of the costs from trust income and three-fourths of the costs from trust principal. The remainder beneficiaries objected to the trustee’s proposed allocation, arguing that the trust required the litigation costs to be paid only from the income generated by the trust because the trust document stated that the trustee was “authorized and directed to pay … administration costs from the trust income.”

The income beneficiary and trustee argued that the costs should be apportioned between the income and the principal. In support of their argument, they noted that the trust granted the trustee “power and authority to do any act or thing reasonably necessary or advisable for the proper administration, management and distribution of this trust[.]” Further, Iowa Code § 637.103(2) requires that a trustee treat all beneficiaries fairly when there is a discretionary power.

The district court ordered one-fourth of the expenses to be paid from the income and the remaining three-fourths to be paid from the principal. The remainder beneficiaries appealed.

Analysis

In affirming the lower court’s decision, the Iowa Court of Appeals found that the litigation costs and attorney fees should not be categorized as administrative costs. Instead, the trustee’s power to pay the costs derived from a trust clause that empowered the trustee to do all things reasonably necessary for proper administration. The court further reasoned that since the settlement benefitted all four beneficiaries, it would be unfair for the one income beneficiary to shoulder all the expenses in obtaining the settlement. Finally, the court noted that it was “only logical” that the principal be used to pay for the costs since the settlement funds were allocated to the principal.