Estate Planning Complications

April 24, 2010 | Erin Herbold

 

A fundamental point of estate planning, especially in families with both on-farm and off-farm heirs, is that “fair” doesn’t necessarily mean “equal.”  Here, the Iowa courts were asked to determine the value of shares distributed from a trust and whether those shares should be valued at the time of the grantor’s death or at the time of the distribution of the assets. 
The decedent had expressed a desire during life to devise a plan to “equally” distribute his vast holdings between his two children upon his death. Both children were active in the family business which owned motels, a construction company, and a real estate holding company. Shortly before his death, he executed a trust agreement to distribute the majority of his holdings and appointed his two children as co-trustees. A marital trust for his wife (step-mother of the children) was also drafted. The overall plan was for the daughter to inherit the motel holdings, the son to inherit the construction company and for the siblings to divide the real estate holding company. The trust instrument provided for a specific method of valuation to equalize the siblings’ inheritance. 

When the decedent’s death in 1992, a lengthy probate process began and, in 1994, the stock in the motels was transferred to the daughter and the stock in the construction company was distributed to the son.  The court also ordered that the son be granted a partial distribution of 42,000 shares of the real estate holding company. The daughter did not receive such a distribution. Due to several factors, including disagreements with IRS over federal estate taxes due and implementation of the marital trust, the probate process was significantly delayed. 

By the time the step-mother died in 2000, the brother and sister were at odds. The sister demanded an accounting regarding the trust and the real estate holding company, suspecting her brother was making improper distributions to himself. Finally, in 2004, the trial court ordered the brother to repay nearly $300,000 to the real estate holding company, ruling that he breached his fiduciary duties by making improper distributions and management fee payments to his own accounts.  Further, the trial court found that between the years of 1993 and 2001, the brother had transferred the majority of the stock from the real estate holding company to himself. 

Despite the 2004 ruling, the brother failed to repay the $300,000. Thus, the siblings returned to court and asked them to terminate the trust and resolve the remaining disputes. The court acknowledged that the “pivotal” issue was whether the trust assets should have been valued at the date of the father’s death or at their present value. The trial court determined that present-day values should be used and ordered the brother to pay nearly $1.5 million dollars to his sister to equalize the trust distribution. 

On appeal, the court discussed the substantial appreciation in the assets during the lengthy probate battle. Thus, the choice between valuation dates would result in a harshly different financial scenario for the sister. The appellate court looked at the language of the trust to determine whether the father’s intent as to valuation was clear. The trust language clearly intended an “apportionment between the children at fair market value.” Further, other trust language indicated that the father intended for the estate to be valued at the date of death, most especially, because it was anticipated that there would be federal estate tax due. Thus, the appellate court used date-of-death valuation in this case.

Next, the appellate court addressed the question of whether the trust should be modified because the distributions were not “equal” when valued at date of death. However, under Iowa Code §633A.2204, the courts are only allowed to modify “administrative” as opposed to distributive provisions of a trust. This is contrary to the law of other states and the Uniform Trust Code, which allows modification of dispositive terms when there are unanticipated circumstances. Thus, the appellate court did not allow modification of the trust. 

Finally, the court determined that the brother did need to repay the excessive management fees and improper distributions from the real estate holding company. Despite the complexity of this case and the issues the court dealt with, the intent of the decedent controlled.  Valuation was the overarching issue here and the key to the outcome was the language of the trust document. Schade v. Gethmann, No. 0-085/09-0617, 2010 Iowa App. LEXIS 313 (Iowa Ct. App., Apr. 21, 2010).