A common estate planning technique is for the value of marital assets to be split evenly between the spouses during life. That is typically accomplished by the re-titling of assets into tenants in common ownership. The result is that each spouse owns an undivided one-half interest in each asset titled in tenancy in common with one-half of the asset’s value being included in the spouse’s estate at death. In addition, tenancy in common ownership allows the decedent to specify in their will who will inherit their undivided one-half interest. That’s an important point when federal estate tax is an issue. The use of tenancy in common ownership is often accompanied with the use of trusts created under the terms of wills of each spouse. In that type of a set-up, the surviving spouse is designated as the beneficiary of the trust for life, is typically entitled to the income from the trust for life and additional principal amounts as necessary, with the remainder passing to the children. Usually, the surviving spouse is also named the trustee of the trust. In that case, the surviving spouse has certain fiduciary duties to the holders of the remainder interest. That last point became an issue in this case.
The husband died with a will that named his surviving spouse the trustee and primary beneficiary of a family trust. She was entitled to the net income of the trust for life, and additional principal distributions as necessary for her health, education, support and maintenance. Upon her death, the couple’s three daughters would each receive an equal share of the principal balance of the trust. Before the husband died, however, the couple incurred substantial credit card debt in an attempt to salvage two businesses. After the husband died, the surviving spouse paid the $55,000 credit card bill and $46,000 attorney fee debt (incurred in prior litigation) from the principal of the trust. They claimed that Mom should have paid those amounts from her own funds, and sued to remove her as trustee based on their claim that she breached her fiduciary duty to them. They didn’t care that if Mom had paid those debts from her own funds she wouldn’t have had enough money to cover her basic living expenses. The trial court agreed, at least in part. The trial court allowed Mom to invade trust principal, but only to the extent of $23,500. The trial court did not rule on the request to remove Mom as trustee.
On appeal, the court reversed. The court determined that the trust created under Dad’s will was a discretionary support trust which gave Mom, as trustee, some discretion as to whether to invade corpus for her support and maintenance. Because the principal invasion was necessary for Mom’s support and maintenance, Mom did not abuse her discretion or breach her fiduciary duty to the children. Accordingly, Mom was entitled to invade the trust corpus for the full amount of the credit card and attorney fee debt. Windus v. McDonald, et al., No. 8-577/07-2006, 2008 Iowa App. LEXIS 598 (Iowa Ct. App. Aug. 27, 2008).