Mother’s Intent Created Trust That Step-father Was Obligated to Establish

January 31, 2013 | Erika Eckley

When a person holds property that was intended to be transferred to another person, the court can create judicial remedies to ensure an equitable resolution and facilitate the transfer of the property to the intended person. Two remedies recently used by the court involved the establishment of a constructive trust and a resulting trust. A constructive trust is created when the holder of property is determined to be the trustee for the benefit of another who is entitled to an interest in the property. A resulting trust is a reversionary interest implied by law in property held by another as trustee for the transferor or the transferor’s successors. Both remedies were established in the following case which arose out of the intention to establish a trust for the benefit of a spouse and adult children that went awry.

In the case, the court was required to determine the rights of the plaintiffs. The plaintiffs are brothers whose mother died of cancer.  Before her death, she made written arrangements in her will to leave certain assets to her spouse--the defendant--and to her sons. She also made arrangements to change all of her beneficiary forms  to have the accounts go into a trust for the benefit of the spouse and the plaintiffs. The trust was intended to pay off her marital home, marital debts, and have the remainder divided equally between the sons and spouse. The accounts were worth approximately $600,000.

The beneficiary forms for the accounts were changed prior to the execution of the will, but they named the husband as the beneficiary rather than the trust that was to be created through the terms of her will. Shortly after her will was drafted and the beneficiary forms were changed, the mother died. The sons met with the defendant to discuss the terms of the will. At the meeting, the defendant told the plaintiffs that he would pay off the house and the credit cards as directed by their mother and then distribute the remaining assets with one-third to each one of them.

Unfortunately, sometime after this meeting, the defendant met the twenty-three year-old love of his life named Kayla and all bets were off. During the course of the whirlwind romance, marriage, and eventual divorce, the defendant neglected to pay off the mortgage, credit cards, or the plaintiffs. By the time the suit was brought, he had filed bankruptcy and the marital home was in foreclosure.

The plaintiffs sued to set aside the will and the change in beneficiary forms. They later added claims for breach of fiduciary duty and conversion.  At trial, the defendant testified that a week after the wife’s will was completed, she changed her mind and told the defendant that she wanted him to keep all of the money for himself, which is why he was listed individually as the beneficiary.   The trial court ruled that the change of beneficiary forms named the defendant as beneficiary in his role as trustee rather than in his individual capacity and that the change was made to further the mother’s intention to pay off debts and distribute money to her sons. The court also noted that the defendant even admitted this was his wife’s intent. The court imposed a resulting trust and a constructive trust on funds received through the beneficiary forms on the wife’s accounts. The court also held that the defendant breached his common law duty to the sons and that the defendant would be unjustly enriched if allowed to keep all of the assets.  The trial court ruled in favor of the plaintiffs in the amount of $94,663.04 each.

The defendant appealed. His primary argument was that the beneficiary forms listing him as the sole beneficiary were unambiguous and the court erred in reviewing extrinsic evidence to alter the written terms of the forms.  The appellate court agreed that the change of beneficiary forms had a “latent ambiguity” because the language did not miss the wife’s clearly established intent as expressed in her will. Because there was ambiguity, the trial court was correct in using extrinsic evidence to construe the wife’s intent in regards to the capacity by which the defendant was named beneficiary.

The appellate court also upheld the constructive trust to enforce the terms of the wife’s written will. The plaintiffs established that the trust was not created based on their expectancy to inherit from their mother, which would not be permitted, but through the expressly stated intent of her will in regards to the distribution of her assets.

The appellate court also upheld the trial court’s determination that a resulting trust was created. The court agreed with the defendant that the general rule is that when there is a reasonable theory that would allow the legal title to stand, no trust will be declared. But, the court held that in this situation, there was an express intention by the wife to create a trust to distribute the assets according to her instructions, and the beneficiary forms were titled in the defendant’s name to pool the assets and distribute according to her will.

The court also upheld the trial court’s determination that the defendant breached his fiduciary duties to the plaintiffs upon the establishment of a resulting trust. The plaintiffs proved the existence of a resulting trust.  Instead of acting in the interest of the plaintiffs, however, the defendant spent all of the money placed into his hands as trustee.

This case is one more reminder of why it is important for practitioners and all involved to ensure all beneficiary forms and other changes are made timely and correctly. It is possible that if the beneficiary forms had been clearly drafted, this matter would not have been necessary.

Monsma v. Anderson, No. 2-1008, 2013 Iowa App. LEXIS 10 (Iowa Ct. App. Jan. 9, 2013).